SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K/A
_________________________
Amendment to Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1999 Commission File No. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
California 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 481-2000
Securities registered pursuant to Section 12 (b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
13-3/4% Convertible Subordinated Debentures, Series B due 2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes 1
No0
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in part III of this
Form 10-K or any amendment to this Form 10-K. 0
The aggregate market value based on the closing price of the
Registrant's Common Stock held by nonaffiliates of the Registrant was
approximately $48,550,000 as of December 16, 1999.
There were 13,818,767 shares of outstanding Common Stock of the
Registrant as of December 16, 1999.
Total number of pages: 84. Exhibit index begins on page 80.
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The undersigned registrant (the "Registrant") hereby amends its Annual
Report on Form-K for the fiscal year ended
September 30, 1999 (the "Report") as follows:
PART I
1. Business
General
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company which principally develops, produces, and
distributes original feature films and television programming. The
Company's feature films are developed and produced for the theatrical,
made-for-video and pay cable motion picture markets. The Company's
television programming has included television series, mini-series,
movies-for-television, animation, reality and game show programming for
the major networks, cable television, first-run syndication and
international markets.
The Company established its feature film production operations in 1993.
In 1994, the Company established an international theatrical film
subsidiary to expand into foreign theatrical distribution. In 1995, in
response to the increased demand for product by the pay-per-view,
telephone delivery, pay cable and basic cable services, the Company
formed an entity called KLC/New City Tele-Ventures to acquire product
from third parties for distribution in the cable, pay service and
satellite markets, as well as other emerging markets. The joint
venture has acquired over 100 films for this purpose. The Company owns
82.5% of this entity.
In late 1997, the Company acquired an 80% interest in US SEARCH.com, a
leading provider of fee-based people search and other customized
individual reference services. In June 1999 US SEARCH.com completed an
initial pubic offering in which the Company sold a portion of its
shareholdings. Currently, the Company owns 55.2% of US SEARCH.com.
In February 1998 the Company established KL/Phoenix, an 80% owned
venture, which distributes film and television product in Latin
America. In November 1998, the Company launched Gran Canal Latino
("GCL"), a satellite channel through a newly-formed 80%-owned
subsidiary. GCL broadcasts 24 hours a day, with a selection of Spanish
language films mostly from Spain. GCL's satellite transmission reaches
the United States and all of Latin America including Mexico. Under a
distribution arrangement with Enrique Cerezo, the Company is
broadcasting selections from 1,500 Spanish language movie titles. In
June 1999 the Company obtained a 20% ownership interest in Digital
Renaissance, a German digital special effects facility. In April 1999
the Company obtained warrants and a minority ownership interest in The
Harvey Entertainment Company in exchange for 468,886 shares of common
stock of the Company.
The Company's feature films for fiscal 1999 generated $14,081,000 of
revenues. One Man's Hero starring Tom Berenger and distributed
domestically by MGM, Ringmaster starring Jerry Springer, which Artisan
Entertainment released domestically in November 1998, and But I'm A
Cheerleader, which is to be released theatrically by New Line Cinema,
were delivered by the Company in fiscal 1999. In addition, the Company
has recently completed principal photography on Picking Up The Pieces
starring Woody Allen, Sharon Stone and David Schwimmer, The St.
Francisville Experiment and They Nest, starring Dean Stockwell, John
Savage and Thomas Calabro, and is preparing for principal photography
on Vlad the Impaler.
Since its inception in 1983, the Company has produced or distributed
over 1,000 hours of original television programming, including various
television series, movies-for-television and mini-series. For fiscal
1999, the Company's television slate generated $6,878,000 of revenue,
principally from network and international licensing of three feature
length television movies, The Last Producer directed by Burt Reynolds
and starring Burt Reynolds, Lauren Holly and Benjamin Bratt, Mambo Cafe
starring Thalia and Danny Aiello, Freeway II: Confessions of a Trick
Baby starring Natasha Leone, Vincent Gallo, a pilot for a television
series and a co-produced 13-episode series, Would You Believe It for
the Discovery Channel.
TV First, a partnership 50% owned by the Company, purchases media time
for Christian music infomercials and commenced retail marketing of
compact discs and audio and video cassettes in fiscal 1999. Fiscal
1999 sales by the joint
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venture exceeded $1,300,000. In October 1999 the Company sold its
partnership interest to its partner.
The Company's operating revenues were $49,890,000 for the fiscal year
ended September 30, 1999, a decrease of 34% from the $76,130,000
recognized for the fiscal year ended September 30, 1998. This decrease
reflects reduced television series production, partially offset by
increased revenues from US SEARCH.com and increased availabilities of
feature films.
Forward Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act
of 1995 which involve certain risks and uncertainties which could cause
actual results to differ materially from those discussed herein. Such
risks and uncertainties include, but are not limited to, liquidity and
financing requirements, variability of quarterly results and prior
losses, increased interest expense, dependence on a limited number of
projects, certain accounting policies including amortization of film
costs, dependence on key personnel, production deficits, the risk
involved in the Internet, television and theatrical film industries,
competition, government regulation, labor relations, limited operating
history and continued operating losses of US SEARCH.com, reliance of US
SEARCH.com on strategic relationships in Internet market, uncertain
acceptance and maintenance of the 1-800-US SEARCH brand, risks
associated with offering new services, risks associated with growth and
expansion, liability for online content, rapidly changing technology,
standards and consumer demands, online commerce security risks,
including credit card fraud, system disruptions and capacity
constraints for US SEARCH.com, risks associated with domain names, year
2000 compliance, shares available for future sale, and the volatility
of public markets. See the relevant discussions elsewhere herein, and
in the Company's registration statement on Form S-3 (Registration No.
333-80521), as filed on June 11, 1999 and the Company's periodic
reports and other documents filed with the Securities and Exchange
Commission for further discussions of these and other risks and
uncertainties pertaining to the Company and its business.
U.S. SEARCH.com, Inc.
General. US SEARCH.com, Inc. ("US SEARCH.com"), a 55.2% owned
subsidiary of the Company as of September 30, 1999, is a leading
provider of fee-based people search and other customized individual
reference services. US SEARCH.com uses a wide variety of public
records and other publicly available information on individuals. In
June 1999 US SEARCH.com completed an initial pubic offering in which
the Company sold a portion of its shareholdings as well.
US SEARCH.com's services are marketed through its US SEARCH.com and
1800ussearch.com Internet world wide web ("Web") sites and through its
direct response 1-800USSEARCH telephone number. US SEARCH.com operates
a 24 hour, seven days a week sales and service center, where its
employees research, aggregate and cross-check data from a wide variety
of sources. Research results are placed in a pre-formatted template
and then delivered to US SEARCH.com's customers via e-mail, fax or U.S.
mail.
US SEARCH.com's quarterly revenues have grown from $1,804,000 in the
quarter ended March 31, 1998 to $6,163,000 in the quarter ended
September 30, 1999. Unique visitors to the websites have increased
from 4,600,000 in the quarter ended March 31, 1999 to 11,200,000 in the
quarter ended September 30, 1999.
US SEARCH Services
US SEARCH.com provides individual, corporate and professional clients
with quick, easy and inexpensive access to a broad range of public
record information about individuals. A client can request a search
from anywhere, at any time through US SEARCH.com's Web site,
1800USSEARCH.com, or by calling its toll free telephone number, 1-800
U.S. SEARCH. The search is performed quickly by electronically
accessing multiple, geographically-dispersed public record databases,
aggregating the requested information, and then delivering the search
results in a user-friendly format, often within seconds or minutes. US
SEARCH.com is often able to fulfill a client's search requests based on
minimal client input information, such as a first and last name or a
date of birth.
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US SEARCH.com provides clients with a single, comprehensive access
point to a broad range of public record information about individuals.
The fees for US SEARCH.com's services range from $10.00 to $500.00 per
transaction based on the nature and amount of information gathered and
whether or not the search is assisted by a search specialist. In
November 1999 US SEARCH.com expanded its service offerings to include
pre-employment background screening and other services for corporate
and professional clients and government agencies.
Instant Searches. US SEARCH.com offers Internet-based "Instant
Searches," which include general individual locator, first name only,
national death records, real estate records, civil court records, civil
judgments and bankruptcy searches. Instant Searches are performed
automatically and results are delivered via the Web site, often in a
matter of seconds or minutes. US SEARCH.com applies up to a portion of
the cost of the individual locator "Instant Searches" purchased online
by the client towards the cost of the more comprehensive search.
Individual Locator. This service is targeted at individual, corporate
and professional clients interested in locating missing individuals
such as long-lost friends, family, former employees, or business
contacts. Corporate and professional organizations may also wish to
locate a large number of members in connection with class reunions,
corporate gatherings or fundraising efforts.
Individual Public Record Reports. Individual or corporate clients can
order a public record search to verify information about a person and
determine whether there is any material information about a person's
history that has not been disclosed. Using this service, a client will
receive information about a person's previous addresses, lawsuits,
judgments, UCC filings, property ownership and corporate affiliations.
Anti-Fraud Identification Verification. This service allows clients to
search for evidence of anyone using their social security number or
assuming their identity for fraudulent purposes. One of the major
causes of credit card fraud is the unlawful use of a person's social
security number to gain credit. US SEARCH.com's service allows for
early detection of this activity, avoiding time consuming and costly
resolution.
Nationwide Court Records Search. This service allows clients to search
court records across all 50 states to determine if an individual has
filed any lawsuits, had lawsuits filed against them, obtained a civil
judgment, had a civil judgment filed against them, had property or tax
liens against them, had any foreclosures, or had any unlawful detainers
filed against them. US SEARCH.com also recently introduced Criminal
Records Searches on a county-by county basis in all 50 states.
For the nine months ended September 30, 1999, US SEARCH.com's
individual locator and "Instant Searches" services accounted for over
85% of its revenues.
Services Under Development During Fiscal 1999
Additional "Instant Searches." US SEARCH.com intends to begin offering
several additional Internet-based "Instant Searches" on its Web site.
For example, US SEARCH.com recently began offering "Instant" lawsuit
searches, legal judgment searches, real property searches, and intends
to introduce instant UCC filings searches and unclaimed property
searches. As with its current "Instant Searches," clients would be
able to directly access these services online and receive results in a
completely automated fashion via its Web site, often in as little as
seconds or minutes.
Pre-Employment Background Screening. In November 1999, US SEARCH.com
began offering pre-employment background screening services to
corporate and professional clients. This service allows corporate and
professional clients to conduct automated public record information
searches in connection with hiring and other employment decisions. US
SEARCH.com expects to design customized templates with appropriate
fields on separate Web pages with secure access for its corporate and
professional clients.
Using US SEARCH Services
Using US SEARCH.com's services is quick, easy and inexpensive. Clients
can access US SEARCH.com's services
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through its user-friendly Web site, 1800USSEARCH.com, as well as its
toll free telephone number, 1-800 U.S. SEARCH. Services are available
24 hours a day, seven days a week.
1800USSEARCH.Com Web Site. Clients can access US SEARCH.com's Web site
directly or can click through via its advertising on the people search
services of one of the following Internet search engines and popular
Web sites: AOL.com, msn.com, Excite.com, InfoSpace.com, Lycos.com,
Snap.com, Infoseek.com, WhoWhere.com, Tripod.com and Angelfire.com.
From US SEARCH.com's Web site, a client can choose from one of its
completely automated "Instant Searches" or from several different types
of assisted searches. Once a search is selected, a client will be
prompted to fill in specific information, such as the full name, birth
date, social security number or last known address of the individual
about whom the information is requested.
In the case of Internet-based "Instant Searches," the search request is
processed online, and the results are delivered in often as little as a
few seconds or minutes. In the case of partially-automated searches,
the request is forwarded to one of US SEARCH.com's search specialists
for fulfillment. US SEARCH.com's computer system then assembles the
results into a pre-formatted template. After review, the completed
report is delivered to the client by email, facsimile or mail.
US SEARCH Telephone Services. Through its toll free telephone number,
1-800 U.S. SEARCH, US SEARCH.com provides additional search services
for more complex and in- depth search requests. US SEARCH.com's
operations and support center has trained search specialists and
customer service agents available 24 hours a day, seven days a week.
If a client's online search via US SEARCH.com's Web site is
unsuccessful or he desires additional information, the client can then
call in to request additional, more comprehensive search services which
may include using a search specialist to assist in completing the
search request.
Public Record Information Database Sources. US SEARCH.com has direct
and indirect electronic access to a broad range of public record
databases and other information sources such as CSRA/Ameridex,
Metromail and DBT Online. US SEARCH.com maintains open accounts with
its data providers and pays fixed fees per inquiry.
US SEARCH.com continually evaluates its information database sources
both to ensure that it has access to the most timely, cost-effective,
accurate and comprehensive data, and to expand the number of automated
searches offered to its clients. If US SEARCH.com determines that a
particular information database source is inadequate or it otherwise
becomes unavailable, US SEARCH.com believes it can switch to an
alternative data source with some increase in cost and without
significant delay. From time to time US SEARCH.com expects to evaluate
potential acquisitions or investments in in-house proprietary
information databases to complement its access to third party data
providers.
Marketing and Brand Awareness
US SEARCH.com markets its services through a combination of Internet
and television advertising featuring its US SEARCH brand. US
SEARCH.com intends to strengthen its US SEARCH brand through extensive
advertising, emphasis on its 1800USSEARCH.com Web site and promotion of
additional public record information and search services under the US
SEARCH brand. US SEARCH.com also intends to combine an increasing
level of key Internet advertising with strategically placed television
advertising to attract a great number of users to its Web site.
Internet Advertising. US SEARCH.com believes that marketing agreements
with Internet search engines and popular Web sites have increased its
brand recognition and attracted clients. US SEARCH.com generates
visitors to its Web site from its various forms of Internet
advertising, such as banners, buttons, text links and key words within
search engines, and online white pages. US SEARCH.com maintains
marketing agreements with leading Internet search engines and popular
Web sites, including InfoSpace.com, The Lycos Network, Go
Network/Infoseek, Snap.com and Yahoo!. These marketing agreements have
placed its advertising on major Web sites such as InfoSpace.com,
AOL.com, msn.com, Lycos.com, Snap.com, WhoWhere.com, Tripod.com,
Angelfire.com, Go Network/Infoseek.com, Excite.com and Yahoo.com. US
SEARCH.com intends to develop relationships with other companies, based
on traffic patterns, customer profiles, and related services in order
to increase its advertising presence on the Internet.
Television Advertising. US SEARCH.com uses television advertising to
promote its services. The principal form of
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television advertising used includes 10-second promotional fee spots on
national television programs that prominently feature its toll free
telephone number, 1-800 U.S. SEARCH, and Web site address,
1800USSEARCH.com. US SEARCH.com believes that its television
advertising has enabled it to increase the reach of its US SEARCH brand
and services.
US SEARCH.com is currently the network closed captioning sponsor for
CNBC and regularly appears on other cable networks including MSNBC,
CNN, CNN Headline News and Fox News. US SEARCH.com is also a fee spot
sponsor of the two highest rated syndicated television programs,
Jeopardy and Wheel of Fortune. US SEARCH.com advertises weekly on
Leeza, The Ricki Lake Show, Hollywood Squares, Judge Judy, The Dating
Game, Newlywed Game and Judge Joe Brown. US SEARCH.com intends to
expand its fee spot advertising as opportunities arise. US SEARCH.com
intends to reach a wider audience and to attract more clients through
the use of longer length commercials (15, 30 and 60 seconds) and longer
format commercials which provide marketing flexibility not available
with the 10-second fee spots.
Marketing to Corporate and Professional Clients. US SEARCH.com is
establishing a corporate sales force and a team of research specialists
to promote and increase the marketing of its services to prospective
professional and corporate clients and to address the specific needs of
each corporate and professional client. US SEARCH.com also has begun
to offer corporate accounts with volume discounts to promote and market
its services. For example, beginning in November 1999, US SEARCH.com
began offering pre-employment background screening services to
corporate and professional clients, allowing these clients to conduct
automated public record information searches in connection with hiring
and other employment decisions. In addition, US SEARCH.com expects to
design customized Web pages with specific search criteria tailored to
the needs of each corporate and professional client.
US SEARCH.com's executive offices are currently located at 9107
Wilshire Blvd., Suite 700, Beverly Hills, California 90210, and its
telephone number is (310) 553-7000. US SEARCH.com had 198 full time
employees and 45 part time employees as of December 10, 1999.
Motion Picture Industry Overview
The business of the motion picture industry may be broadly divided into
two major segments: production, involving the development, financing
and making of motion pictures; and distribution, involving the
promotion and exploitation of completed motion pictures in a variety of
media.
Historically, the largest companies, the so-called "Majors" and "mini-
Majors," have dominated the motion picture industry by both producing
and distributing a majority of the motion pictures which generate
significant theatrical box office receipts. Over the past 15 years,
however, "Independents" or smaller film production and distribution
companies, such as the Company, have played an increasing role in the
production and distribution of motion pictures to fill the increasing
worldwide demand for filmed entertainment product.
The Majors (and mini-Majors) include Universal Pictures (a division of
Seagram), Warner Bros. Pictures (a division of Time Warner), Metro-
Goldwyn-Mayer Inc., Twentieth Century Fox Film Corporation (a division
of News Corporation), Paramount Pictures Corporation (a division of
Viacom) , Sony Pictures Entertainment (including Columbia Pictures,
TriStar Pictures and Triumph Releasing; altogether divisions of Sony)
and The Walt Disney Company (Buena Vista Pictures, Touchstone Pictures
and Hollywood Pictures). Generally, the Majors own their own
production studios (including lots, sound stages and post-production
facilities), have nationwide or worldwide distribution organizations,
release pictures with direct production costs generally ranging from
$25,000,000 to $75,000,000, and provide a continual source of pictures
to film exhibitors. In addition, some of the Majors have divisions
which are promoted as "independent" distributors of motion pictures.
These "independent" divisions of Majors include Miramax Films (a
division of The Walt Disney Company), Sony Classics (a division of Sony
Pictures), Fox Searchlight (a division of News Corporation), and New
Line (a division of Time Warner) and its Fine Line distribution label.
Most of these divisions were formerly Independents.
In addition to the Majors, the Independents engaged primarily in the
distribution of motion pictures produced by companies other than the
Majors include, among others, Trimark Holdings and Artisan
Entertainment. The Independents typically do
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not own production studios or employ as large a development or
production staff as the Majors.
Motion Picture Production and Financing
The production of a motion picture requires the financing of the direct
costs and indirect overhead costs of production. Direct production
costs include film studio rental, cinematography, post-production costs
and the compensation of creative and other production personnel.
Distribution costs (including costs of advertising and release prints)
are not included in direct production costs.
Majors generally have sufficient cash flow from their motion picture
and related activities, or in some cases, from unrelated businesses
(e.g., theme parks, publishing, electronics, and merchandising) to pay
or otherwise provide for their production costs. Overhead costs are,
in substantial part, the salaries and related costs of the production
staff and physical facilities which Majors maintain on a full-time
basis. Majors often enter into contracts with writers, producers and
other creative personnel for multiple projects or for fixed periods of
time.
Independents generally avoid incurring substantial overhead costs by
hiring creative and other production personnel, but retaining the other
elements required for pre-production, principal photography and post-
production activities only on a project-by-project basis. Independents
also typically finance their production activities from various
sources, including bank loans, "pre-sales," equity offerings and joint
ventures. Independents generally attempt to complete their financing
of a motion picture production prior to commencement of principal
photography, at which point substantial production costs begin to be
incurred and require payment.
"Pre-sales" are often used by Independents to finance all or a portion
of the direct production costs of a motion picture. Pre-sales consist
of fees or advances paid or guaranteed to the producer by third parties
in return for the right to exhibit the completed motion picture in
theaters or to distribute it in home video, television, international
or other ancillary markets. Payment commitments in a pre-sale are
typically subject to delivery and to the approval of a number of
prenegotiated factors, including script, production budget, cast and
director.
Both Majors and Independents often acquire motion pictures for
distribution through an arrangement known as a "negative pickup" under
which the Major or Independent agrees to acquire from another
production company some or all rights to a film upon its completion.
The Independent often finances production of the motion picture
pursuant to financing arrangements with banks or other lenders wherein
the lender obtains a security interest in the film and in the
Independent's rights under its distribution arrangement. When the
Major or Independent "picks up" the completed motion picture, it may
assume some or all of the production financing indebtedness incurred by
the production company in connection with the film. In addition, the
production company is often paid a production fee and is granted a
participation in the profits from distribution of the motion picture.
Both Majors and Independents often grant third-party participations in
connection with the distribution and production of a motion picture.
Participations are contractual rights of actors, directors,
screenwriters, producers, owners of rights and other creative and
financial contributors entitling them to share in revenues or profits
(as defined in the respective agreements) from a particular motion
picture. Except for the most sought-after talent, participations are
generally payable only after all distribution and marketing fees and
costs, direct production costs (including overhead) and financing costs
are recouped by the producer in full.
Motion Picture Distribution
Distribution of a motion picture involves the domestic and
international licensing of the picture for (i) theatrical exhibition,
(ii) home video, (iii) presentation on television, including pay-per-
view, video-on-demand, satellites, pay cable, network, basic cable and
syndication, (iv) non-theatrical exhibition, which includes airlines,
hotels, armed forces facilities and schools and (v) marketing of the
other rights in the picture, which may include books, CD-ROMs,
merchandising and soundtrack recordings.
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Theatrical Distribution and Exhibition. Motion pictures are often
exhibited first in theaters open to the public where an admission fee
is charged. Theatrical distribution involves the manufacture of
release prints, licensing of motion pictures to theatrical exhibitors,
and promotion of the motion picture through advertising and promotional
campaigns. The size and success of the promotional and advertising
campaign may materially affect the revenues realized from its
theatrical release, generally referred to as "box office gross." Box
office gross represents the total amounts paid by patrons at motion
picture theaters for a particular film, as determined from reports
furnished by exhibitors. The ability to exhibit films during summer
and holiday periods, which are generally considered peak exhibition
seasons, may affect the theatrical success of a film. Competition
among distributors to obtain exhibition dates in theaters during these
seasons is significant. In addition, the costs incurred in connection
with the distribution of a motion picture can vary significantly
depending on the number of screens on which the motion picture is to be
exhibited and the ability to exhibit motion pictures during peak
exhibition seasons. Similarly, the ability to exhibit motion pictures
in the most popular theaters in each area can affect theatrical
revenues. Exhibition arrangements with theater operators for the first
run of a film generally provide for the exhibitor to pay the greater of
90% of ticket sales in excess of fixed amounts relating to the
theater's costs of operation and overhead, or a minimum percentage of
ticket sales which varies from 40% to 70% for the first week of an
engagement at a particular theater, decreasing each subsequent week to
25% to 30% for the final weeks of the engagement. The length of an
engagement depends principally on the audience response to the film.
Films with theatrical releases (which generally may continue for
several months domestically) typically are made available for release
in other media as follows:
<TABLE>
<CAPTION>
Market Months After Theatrical Release Approximate Release Period
- --------------------------------------------------------------------------------
<S> <C> <C>
Domestic home video 4 - 6 months 6 months
Domestic pay-per-view 6 - 9 months 3 months
Domestic pay cable 10 - 18 months 12 - 21 months
Domestic network or basic cable 30 - 36 months 18 - 36 months
Domestic syndication 30 - 36 months 3 - 15 years
International theatrical --- 4 - 6 months
International home video 6 - 12 months 6 months
International television 18 - 24 months 18 months - 10 years
</TABLE>
Home Video. The home video distribution business involves the
promotion and sale of videocassettes, DVDs and videodiscs to video
retailers (including video specialty stores, convenience stores, record
stores and other outlets), which then rent or sell the videocassettes
and videodiscs to consumers for private viewing. The home video
marketplace now generates total revenues greater than the domestic
theatrical exhibition market.
Videocassettes of feature films are generally sold to domestic
wholesalers on a unit basis. Unit-based sales typically involve the
sales of individual videocassettes to wholesalers or distributors at
$20.00 to $50.00 per unit and generally are rented by consumers for
fees ranging from $1.00 to $5.00 per day (with all rental fees retained
by the retailer). Wholesalers who meet certain sales and performance
objectives may earn rebates, return credits and cooperative advertising
allowances. Selected titles including certain made-for-video programs,
are priced significantly lower to encourage direct purchase by
consumers. The market for direct sale to consumers is referred to as
the "priced-for-sale" or "sell-through" market.
Technological developments, including videoserver and compression
technologies which regional telephone companies and others are
developing, and expanding markets for DVD and laser discs, could make
competing delivery systems economically viable and could significantly
impact the home video market generally and, as a consequence, the
Company's home video revenues.
Pay-Per-View. Pay-per-view television allows cable and satellite
television subscribers to purchase individual programs, primarily
recently released theatrical motion pictures, sporting events and music
concerts, on a "per use" basis. The fee a subscriber is charged is
typically split among the program distributor, the pay- per-view
operator and the cable operator.
Pay Cable. The domestic pay cable industry (as it pertains to motion
pictures) currently consists primarily of HBO/Cinemax, Showtime/The
Movie Channel, Encore/Starz and a number of regional pay services. Pay
cable services are
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sold to cable system operators for a monthly license fee based on the
number of subscribers receiving the service. These pay programming
services are in turn offered by cable system operators to subscribers
for a monthly subscription fee. The pay television networks generally
acquire their film programming by purchasing the distribution rights
from motion picture distributors.
Non-Theatrical Markets. In addition to the distribution media
described above, a number of sources of revenue exist for motion
picture distribution through the exploitation of other rights,
including the right to distribute films to airlines, schools,
libraries, hotels, armed forces facilities and hospitals.
International Markets. The worldwide demand for motion pictures has
expanded significantly as evidenced by the development of new
international markets and media. This growth is primarily driven by
the overseas privatization of television stations, introduction of
direct broadcast satellite services, growth of home video and increased
cable penetration.
Company Motion Picture Acquisitions
In addition to its own production activities, the Company continually
seeks to acquire rights to films and other programming from Independent
film producers, distribution companies and others in order to increase
the number of films it can distribute in the emerging new delivery
systems. To be successful, the Company must locate and track the
development and production of numerous independent feature films.
Types of Motion Pictures Acquired. The Company generally seeks to
produce or acquire motion pictures across a broad range of genres,
including drama, thriller, comedy, science fiction, family, action and
fantasy/adventure, which will individually appeal to a targeted
audience. The Company has been very selective in acquiring higher
budget (over $10,000,000) films because of the interest that the Majors
have shown in acquiring such films, and the associated competition and
higher production advances, minimum guarantees and other costs. The
Company acquires projects when it believes it can limit its financial
risk on such projects through, for example, significant presales, and
when it believes that a project has significant marketability. In most
cases, the Company attempts to acquire rights to motion pictures with a
recognizable marquis "name" personality with public recognition,
thereby enhancing promotion of the motion pictures in the home video or
international markets. The Company believes that this approach
increases the likelihood of producing a product capable of generating
positive cash flow, ancillary rights income and the possibility of a
theatrical release.
Methods of Acquisition. The Company typically acquires films on either
a "pick-up" basis or a "pre-buy" basis. The "pick-up" basis refers to
those films in which the Company acquires distribution rights following
completion of most or all of the production and post-production
process. These films are generally acquired after management of the
Company has viewed the film to evaluate its commercial viability.
The "pre-buy" basis refers to films in which the Company acquires
distribution rights prior to completion of a substantial portion of
production and post-production. Management's willingness to acquire
films on a pre-buy basis is based upon factors generally including the
track record and reputation of the picture's producer, the quality and
commercial value of the screenplay, the "package" elements of the
picture, including the director and principal cast members, the budget
of the picture and the genre of the picture. Before making an offer to
acquire rights in a film on a pre-buy basis, the Company may work with
the producer to modify certain of these elements. Once the
modifications are considered acceptable, the Company's obligation to
accept delivery and make payment is conditioned upon receipt of a
finished film conforming to the script reviewed by the Company and
other specifications considered important by the Company.
Acquisition Process. If the Company locates a motion picture project
which it believes satisfies its criteria, the Company may pay an
advance or a guaranteed minimum payment conditioned upon delivery of a
completed film ("minimum guarantee") against a share or participation
in the revenue actually received by the Company from the exploitation
of a film in each licensed media. The minimum guarantee is generally
paid prior to the film's release. Typically, the Company will have the
right to recoup the minimum guarantee and certain other amounts from
the distribution revenues realized by the Company prior to paying any
additional revenue participation to the production company.
Film Library. The Company's distribution rights for acquired films and
television programs, which may include worldwide,
<PAGE>
foreign, or domestic rights, generally range from an initial licensing
cycle of seven to 21 years to perpetuity.
Company Feature Film Production
The Company's feature film division was established in 1993 to develop
and produce low and medium budget films. The Company's low to medium
budget films to date have had production budgets ranging from less than
$1 million to $10 million, although the Company from time to time may
release films having higher budgets. The Company's low-budget films
are primarily targeted for direct distribution to the television market
and its medium-budget films may be targeted for theatrical release.
The Company generally retains distribution rights for licensing to
third parties internationally. The Company's films generally are
distributed by third parties domestically or are limited to
international distribution. In unique circumstances, the Company
undertakes limited domestic distribution or co-distribution activities.
The Company's feature film strategy generally is to develop and produce
feature films when the production budgets for the films are expected to
be substantially covered through a combination of pre-sales, output
arrangements, equity arrangements and production loans with "gap"
financing. To further limit the Company's financing risk or to obtain
production loans, the Company often purchases completion bonds to
guarantee the completion of production.
The following films were released or delivered by the Company or its
joint ventures in fiscal 1999:
<TABLE>
<CAPTION>
Picture Initial Media Delivery/Release Date Principal Talent
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Ringmaster Theatrical November 1998 Jerry Springer
One Man's Hero Theatrical June 1999 Tom Berenger
But I'm A Cheerleader Theatrical June 1999 Natasha Lyonne,
Clea DuVall
</TABLE>
The following films are currently scheduled for release or delivery by the
Company in fiscal 2000:
<TABLE>
<CAPTION>
Picture Expected Initial Media
--------------------------------------------------------------
<S> <C>
Picking Up The Pieces Theatrical
The St. Francisville Experiment Theatrical
</TABLE>
There is no assurance that any motion picture which has not yet been
released will be released, that a change in the scheduled release dates
of any such films will not occur or, if such motion picture is
released, it will be successful. The Company has various additional
potential feature films under development. There is no assurance that
any project under development will be produced.
International Distribution
In September 1994 the Company established foreign distribution
operations for its own and third party product. The Company recently
hired Rob Aft to handle the Company's international distribution
activities as President of International Distribution. Arturo Feliu
handles Latin American distribution activities as President of
KL/Phoenix. See Note 10 of Notes to Consolidated Financial Statements
for information on international revenues.
Television Industry Overview
The United States television market remains the largest in the world,
consisting of the principal broadcast networks and their affiliates,
independent television stations and cable television networks.
Expanding international television broadcast, cable and satellite
delivery systems offer further opportunities for the exploitation of
television programming.
Domestic Market. The domestic market for television programming
primarily is composed of four submarkets: the broadcast television
networks (ABC, CBS, NBC and Fox and emerging networks UPN and WBN), pay
cable services (such as HBO/Cinemax, Encore/Starz and Showtime/The
Movie Channel), basic cable services (such as USA Network, the
<PAGE>
Arts & Entertainment Network, Lifetime, The Family Channel, The Disney
Channel, and Turner Broadcasting Network) and syndicators of first-run
programming (such as Universal, King World Productions and Multimedia,
Inc.).
The domestic broadcast television market currently is dominated by the
four major networks, each of which has approximately 200 affiliated
stations. Two of the four major networks are owned by major motion
picture companies. The affiliates broadcast network-supplied
programming and national commercials in return for payments by the
major networks. This relationship results in the networks being able to
reach virtually all of the significant domestic television markets.
There are also a significant number of independent commercial
television stations in the United States. These stations offer an
alternative to network distribution through syndication. The network
schedule provides affiliates with only a portion of their daily program
schedule, and the balance of the time is filled with programs acquired
through television syndication companies or produced locally by the
station.
Cable services generally are classified as being in one of four
categories: telephone delivery, superstations, pay cable services
(e.g., HBO/Cinemax) and basic cable networks (advertiser-supported,
e.g., The Family Channel). The most successful cable networks reach
more than 60% of the U.S. television households. Recently developed
digital compression technology combined with fiber optics or small-
sized satellite dishes may permit cable companies, telephone companies
or direct broadcast satellite systems to expand the domestic television
market up to 500 or more channels.
Television Programming. Each of the four major television networks
currently broadcasts approximately 22 hours of prime-time programming
and approximately 30 hours of daytime programming each week. The
increased channel capacity and large base of cable subscribers that
have developed during the 1980s and 1990s have made possible the
development of a number of pay cable and basic cable networks which
have become important purchasers of both original and rerun television
programming, including movies-for-television, mini-series and series.
Suppliers of television programming include the production division or
affiliated companies of the major networks, major film studios
(Majors), station owners and independent producers (Independents) such
as the Company.
International Markets. The number of international outlets for
television programming has been increasing with the worldwide
proliferation of broadcast, cable and satellite delivery systems. Over
the last ten years, European governments have privatized television
systems in several countries, including Germany, Italy, France and
Spain. The Company believes privatized systems are more likely to
broadcast American programming than government-owned networks. In
addition, both the number of pay and satellite television systems in
Europe and the number of subscribers to these systems have increased.
Pay television and satellite distribution systems also are developing
in other geographic areas, including many Asian countries. In
international markets, suppliers of programming may be subject to local
content and quota requirements which prohibit or limit the amount of
American programming in particular markets. See "Business-Government
Regulations."
Company Television Strategy
The Company was founded in 1983 to develop and produce, on a cost-
effective basis, quality television programming with broad appeal. The
Company's television business has evolved from the production of
programs owned by third parties and typically airing on local
television stations in the first-run syndication market, such as the
long-running daytime series Divorce Court, to the development,
production and ownership of series, movies-for-television and mini-
series for major domestic and international television networks and the
expanding pay and basic cable markets. In 1991, the Company
established an international distribution licensing operation for its
own and acquired television programming. The Company believes that
through the control of the distribution of its own programming this
operation has increased the Company's ability to recover the cost of
new programs and to retain the fees and profit potential previously
realized by third parties.
Due to the major networks' ability to produce programming as well as
distribute it, the Company has decreased the amount of programming it
provides to the major U.S. networks. To position itself for the
perceived growth in the overall television market, the Company is
actively acquiring various forms of domestic cable, video-on-demand and
satellite rights from third party producers for license periods ranging
from fifteen years to perpetuity through its KLC/New City joint
venture. The customary release cycle includes a period of
approximately six months of pay-per-view followed by 18 to 24 months of
pay cable (HBO, Showtime or USA Network, for example), followed by 24
to 48 months of basic cable (Romance Channel,
<PAGE>
Discovery Channel or A&E, for example), and free television thereafter.
The Company utilizes licensing and co-production arrangements to fund
the costs of production, and generally retains additional licensing
rights including, in the case of series, rerun syndication rights which
offer future upside profit potential. The Company generally does not
commence principal photography of its television programming without
first obtaining license or other revenue commitments or production
financing which equal all or a substantial portion of the budgeted
production costs. By obtaining license fees and other pre-committed
revenues through the efforts of its international television
distribution division to cover a substantial portion or all of its
budgeted production costs, the Company believes that it reduces many of
the financial risks associated with an individual production.
Television Program Financing
Development Costs. The Company generally finances project development
costs without third-party involvement until the script commitment
stage. Because of the likelihood that the significant costs in
producing scripts and pilots will not be recovered, the Company
attempts to limit its financial investment by obtaining financial
commitments from networks or other third parties to cover all or a
substantial portion of these costs. See "Business-Television Projects
in Development."
Program Licensing. Generally, the Company licenses to United States
media the right to broadcast a program for a period ending the earlier
of the second broadcast of the program or four years from delivery in
exchange for a license fee which represents a portion of the program's
budgeted production cost. A production order sets forth the principal
terms for a license of the Company's product to a network and specifies
the license fee to be paid and the conditions to be met for payment.
Production orders typically are contingent on the producer's obtaining
certain approvals from the network, including the script, principal
cast and director, prior to commencement of principal photography. The
Company generally retains all other rights to the program and will
usually license certain rights to international broadcasters, enabling
the Company to recoup all, or a portion, of the production costs. In
addition, the Company will typically license additional domestic
releases in other media to cover the remainder, if any, of the
production costs. The Company usually receives its license fee in
installments, with one-third due on or prior to commencement of
principal photography, one-third due upon completion of principal
photography and one-third due upon delivery of the completed program.
International distribution typically involves licensing the rights to
exhibit programming in international territories to broadcasters within
those territories for a fixed license fee usually payable after the
program has been completed. Due to timing differences between the
Company's receipt of license fees and its payment of production costs,
the Company generally is required to fund at least a portion of its
production costs from working capital or secured borrowings, even if
the original license fees equal or exceed budgeted production costs.
For first-run syndication programs, license agreements with the first-
run syndicator generally provide the Company a fixed license fee and a
percentage of revenues from distribution after the syndicator recoups
the fixed license fee and its distribution fees and costs.
An alternate first-run syndication revenue source is called "barter"
sales. A television station, in lieu of or in combination with paying
licensing fees, may grant to the Company's distributor the right to
sell advertising spots during the exhibition of the Company's
television program. For a program to be barterable, exhibition of the
program on stations reaching at least 70% of the U.S. television
households and in most of the top ten major metropolitan areas
typically is required. The amount of the fee paid by the advertiser is
conditioned upon the program achieving certain agreed upon ratings. If
the specified rating is not achieved, the distributor is required to
"make good" by giving the advertiser additional advertising time or
cash payment, and the Company's share of barter revenues decreases.
The Company has licensed its television series Hammer and Could It Be a
Miracle on this basis.
The Company seeks to cover all of its production costs with license
fees and other pre-committed revenues, however it may finance some of
the production costs on its own and may rely on subsequent licensing in
international or other ancillary markets to recoup the remaining
production costs. Additional profits from a television program
initially shown on a network or cable service are realized from
subsequent reruns of the program on local television stations,
international delivery systems and cable services after exhibition on a
major network or cable service. In any event, any production is
subject to the risk of cost overruns, and there is no assurance that
the Company will be able to recover any investment it
<PAGE>
undertakes in a deficit-financed project.
International Co-Productions. The Company has entered into
international co-production arrangements in the past. An international
co-production is a joint venture or partnership between entities in two
or more countries which in certain cases take advantage of alternative
sources of financing for its productions, to utilize international tax
benefits, to pass foreign quota restrictions and to benefit from lower
pre-production costs in certain foreign countries. In a typical co-
production arrangement, the Company transfers all or part of its
copyright ownership in the project to third parties (the co-production
entities), which generally provide a portion of the production
financing and other services. Typically, the co-production partners
grant distribution rights to the Company. Receipts from its
distribution of the project recoup production funding, production fees,
talent participations, distribution fees and expenses. Excess
receipts, if any, are distributed to the various parties in accordance
with their agreed-upon profit participation. The Adventures of
Pinocchio is an example of a co-production with German, French and
English participation, and Swing was a co-production with English
participation.
Producer-for-Hire. In addition to developing and producing its own
programs, the Company on occasion is engaged as a producer-for-hire for
a creative concept or literary property owned by another person.
During the late 1980s, as a producer for hire, the Company produced 860
episodes of Divorce Court, 65 episodes of the Night Games game show,
the animated feature film Pound Puppies: The Legend of Big Paw and the
Family Dog episode of Steven Spielberg's Amazing Stories. This
programming is not included in the Company's library. There are at
least two types of producer-for-hire arrangements. Under the first
type, the Company receives a set fee and agrees to deliver the
completed program for that fee. The Company's profit is the excess of
its fee over its production costs. If production costs exceed the
package fee, the Company bears the deficit. Under the second type, the
Company furnishes personnel as a producer, receives a fixed fee per
episode and the production costs of the program are reimbursed directly
by the distributor.
Rerun Syndication. Domestic rerun syndication typically involves the
exhibition of programming on local television stations and cable
services after exhibition on a major network. Since production costs
for network series may exceed network license fees and other pre-
committed revenues, some television production companies depend on
successful syndication of their programming for profitable operations.
Generally, to be successful in rerun syndication, a television series
must have at least 66 episodes (the equivalent of three full television
seasons).
Television Production Activities
As a producer, the Company first develops literary properties
internally or acquires them from third parties. The Company may refine
the concept of an acquired property. It then attempts to interest one
of the networks or another buyer in the project. If the buyer is
interested in a concept presented to it, the buyer will usually order a
script from the Company. Once the script is delivered, the buyer may
order production of a single pilot episode or a limited number of
episodes in the case of a series, or the entire production in the case
of a movie-for-television or mini-series.
Once production is ordered, the Company and the buyer negotiate a
financing arrangement. The Company then undertakes pre-production
activities in which a budget is prepared, the screenplay is polished or
rewritten, director, actors, a line producer and technical personnel
are engaged, filming is scheduled, locations are arranged and other
steps are taken to prepare the project for principal photography. By
this point, the Company generally has negotiated license fees and
obtained other commitments to cover a substantial portion of the
budgeted production costs. Principal photography is then undertaken,
followed by post-production, in which the film is edited, synchronized
with music and dialogue and, in certain cases, special effects are
added. In the case of a series, if episodes are ordered and the ratings
are sufficiently strong, additional episodes may be ordered for the
entire season and then for additional seasons.
The Company hires writers, directors, cast and crew members on a
project-by-project basis. The terms of employment and compensation are
negotiated in light of an individual's previous experience, the
prevailing market conditions and, where applicable, collective
bargaining agreements. The Company also obtains locations, sets and
post-production personnel and facilities on an as-needed basis. The
Company believes that production and post-production personnel and
facilities are in ample supply at competitive rates.
The production of animated programming is a labor-intensive process
that commences with artistic sketches of the various
<PAGE>
characters and the story line. Storyboards, models, songs and voice
elements are then sent to various production companies, typically in
Asia, where drawings of the animation frames are prepared. The frames
are painted and then subsequently photographed to create film. The
film is then usually sent back to the United States, where final
editing of footage and mixing of sound effects, dialogue and music is
completed, although on occasion final editing and mixing may be
completed in Asia.
The following table summarizes the Company's television programming for
fiscal 1999, the type of program and the network or other medium where
such programming initially exhibited or will exhibit:
<TABLE>
<CAPTION>
Title Type of program First Exhibition
------------------------------------------------------------------------
<S> <C> <C>
Killer App Pilot of a one hour Series Fox
Criminal Minds Pilot of a one hour Series CBS
Mambo Cafe Television Movie Cable
Freeway II: Confessions
of a Trickbaby Television Movie Cable
The Last Producer Television Movie Cable
</TABLE>
There is no assurance that any television program which has not yet
aired will be aired, that a change in the scheduled airing date of such
programming will not occur or, if such television program is aired,
that it will be successful.
Television Projects in Development
To develop successful television projects, the Company requires
adequate access to program concepts, ideas and scripts. Such access is
dependent upon numerous factors, including the reputation and
credibility of the Company in the creative community, the relationships
the Company has in the entertainment industry and the Company's
financial and other resources. The Company occasionally enters into
agreements with producers and writers to develop or acquire new
programming. While the Company may finance the early development of
such projects, the Company typically does not proceed with the
preparation of a script or the production of a pilot, which involves a
more significant financial commitment, unless a network or other buyer
has agreed to fund all or a substantial portion of the costs associated
therewith.
The following table sets forth potential television programming in
various stages of development and the potential network or other medium
to which each may be delivered, if known:
<TABLE>
<CAPTION>
Working Title Type of Program
---------------------------------------------------------------
<S> <C>
They Nest Cable Premiere
Vlad the Impaler Cable Premiere
Aliens Ate My Homework Movie-of-the-Week (Showtime)
Coast Guard One Hour Drama (ABC)
</TABLE>
While the Company has many projects in development, as is typical in
the industry, only a relatively small number of such projects are
ultimately produced (with the likelihood of production being more
remote in the case of television series). It is rare for any projects
in development to have production commitments until late in the
development process. There is no assurance that the Company's efforts
in developing or acquiring potential new programs, including any of the
projects described above, will lead to production commitments or that
any programs that are ultimately produced will be successful.
Television Distribution Activities
United States Distribution. The Company's original and acquired
programming generally is initially licensed to a network or cable
broadcaster for a period expiring on the earlier of two broadcasts or a
period of up to four years from delivery. Following the expiration of
the license, the rights typically revert to the Company's library and
become available for additional licensing. Further revenues are
generally obtained from subsequent licensing in the domestic market in
other
<PAGE>
media, including syndication, cable and home video.
International Distribution. In 1991, the Company commenced the
distribution of its own television programming and, to a lesser extent,
acquired television programs for distribution in international markets.
Programming is distributed primarily to local international
broadcasters and, where available, the home video market, pay
television and cable services. In December 1994, the Company expanded
its activities in international distribution by establishing an
international distribution subsidiary. The Company's combined film and
television distribution division gives the Company increased control
over the marketing of its product line, greater bargaining strength,
and improved cost efficiencies.
The Company's strategy has been to reduce its business risks in
international markets by securing business relationships with strong
local distributors and broadcasters. The Company has entered into
output arrangements in certain foreign territories with broadcasters
and distributors who have agreed to license distribution rights in such
markets for all of the Company's product produced during the specified
term of the agreement (generally between three and five years) at
designated prices for various types of film or television product.
Library
Since its inception in 1983, the Company has produced or acquired more
than 1,000 hours of television programming. The Company's current
library includes a variety of feature films, movies-for-television,
television series, game shows and talk shows produced or acquired by
the Company since its inception. The following table sets forth, as of
December 15, 1999, certain completed feature films and television
programming in which the Company has ownership rights, distribution
rights or the right to share in future profit participation:
<TABLE>
<CAPTION>
Title First Exhibition
---------------------------------------------------------------------
<S> <C>
ABOUT SARAH TELEVISION
ADVENTURE EXPRESS HOME VIDEO
ALIEN ABDUCTION: INTIMATE SECRETS HOME VIDEO
ALIEN ARSENAL HOME VIDEO
ALIENS IN THE WILD WILD WEST HOME VIDEO
ANDRE THEATRICAL
ANDROMINA: THE FANTASY PLANET HOME VIDEO
ANGEL EYES HOME VIDEO
ANGEL IN TRAINING HOME VIDEO
ANGEL OF PASSION HOME VIDEO
ANGRY DOGS TELEVISION
ANIMALYMPICS THEATRICAL
BABYSITTERS HOME VIDEO
BACKLASH: OBLIVION 2 HOME VIDEO
BARE EXPOSURE HOME VIDEO
BASIL THEATRICAL
BEACH BABES FROM BEYOND HOME VIDEO
BEOWULF THEATRICAL
BIKINI DRIVE-IN HOME VIDEO
BIKINI HOE DOWN HOME VIDEO
BIKINI SUMMER 3: SOUTH BEACH HEAT HOME VIDEO
BIKINI TRAFFIC SCHOOL HOME VIDEO
BILLY LONE BEAR TELEVISION
BIMBO MOVIE BASH HOME VIDEO
BLACK AND WHITE PAY CABLE
BLONDE HEAVEN HOME VIDEO
</TABLE>
<PAGE>
<TABLE>
<S> <C>
BLOOD DOLLS HOME VIDEO
BLUE ICE PAY CABLE
BODY STROKES HOME VIDEO
BONE DADDY PAY CABLE
BRAVE LITTLE TOASTER HOME VIDEO
BRAVE LITTLE TOASTER GOES TO MARS HOME VIDEO
BRAVE LITTLE TOASTER TO THE RESCUE HOME VIDEO
BUT I'M A CHEERLEADER THEATRICAL
CAB TO CANADA TELEVISION
CAFE SOCIETY PAY CABLE
CAGED HEARTS HOME VIDEO
CALL GIRL HOME VIDEO
CARNAL FATE HOME VIDEO
CAVE GIRL ISLAND HOME VIDEO
CELL BLOCK SISTERS HOME VIDEO
CENTERFOLD HOME VIDEO
CHRISTMAS WISH TELEVISION
CLOCKMAKER, THE HOME VIDEO
CLOSER, THE THEATRICAL
COMING UNGLUED TELEVISION
CONFESSIONS OF A LAPDANCER HOME VIDEO
CREEPS, THE HOME VIDEO
CRISS CROSS HOME VIDEO
CURSE OF THE PUPPETMASTER HOME VIDEO
DEAD HATE THE LIVING HOME VIDEO
DENIAL PAY CABLE
DESIRES OF INNOCENCE HOME VIDEO
DIARY OF LUST HOME VIDEO
DIFFERENT STROKES HOME VIDEO
DISH DOGS TELEVISION
DONOR, THE HOME VIDEO
DOUBLE EXPOSURE HOME VIDEO
DOUBLE TAP PAY CABLE
DRAGONBALL Z THEATRICAL
DRAGON WORLD: THE LEGEND CONTINUES HOME VIDEO
DREAM MASTER: THE EROTIC INVADER HOME VIDEO
DREAM WITH THE FISHES THEATRICAL
DUNGEON OF DESIRE HOME VIDEO
EGGS FROM 70 MILLION BC HOME VIDEO
ELECTRA HOME VIDEO
ELKE'S EROTIC NIGHTS HOME VIDEO
EROTIC BOUNDARIES HOME VIDEO
EROTIC HOUSE OF WAX HOME VIDEO
ESCORT, THE HOME VIDEO
ESCORT 2, THE HOME VIDEO
ESCORT 3, THE HOME VIDEO
EXCALIBUR KID, THE HOME VIDEO
EXOTIC TIME MACHINE HOME VIDEO
FATAL COMBAT HOME VIDEO
</TABLE>
<PAGE>
<TABLE>
<S> <C>
FEMALIEN HOME VIDEO
FEMALIEN 2 HOME VIDEO
FLESH SUITCASE PAY CABLE
FORBIDDEN GAMES HOME VIDEO
FORBIDDEN GAMES II HOME VIDEO
FORBIDDEN PASSIONS HOME VIDEO
FOREVER LOVE TELEVISION
FREEWAY PAY CABLE
FREEWAY II: CONFESSIONS OF A TRICKBABY HOME VIDEO
FUGITIVE RAGE HOME VIDEO
GALAXY GIRLS HOME VIDEO
GIRL PAY CABLE
GIRLS OF SURRENDER CINEMA HOME VIDEO
GRAVE, THE PAY CABLE
HARBINGER TELEVISION
HARD BOUNTY HOME VIDEO
HEAD OF THE FAMILY HOME VIDEO
HEATWAVE HOME VIDEO
HIDDEN BEAUTIES HOME VIDEO
HIDEOUS HOME VIDEO
HOLLYWOOD MADAM (aka LADY IN WAITING) PAY CABLE
HOTEL EXOTICA HOME VIDEO
HOTTEST BID, THE HOME VIDEO
HUMAN PETS HOME VIDEO
HUSBAND, WIFE, AND LOVER PAY CABLE
IF I DIE BEFORE I WAKE PAY CABLE
ILLICIT DREAMS HOME VIDEO
ILLICIT DREAMS II HOME VIDEO
ILLUSIONS OF SIN HOME VIDEO
IMPROPER CONDUCT HOME VIDEO
INCREDIBLE GENIE, THE HOME VIDEO
INDECENT BEHAVIOR 3 HOME VIDEO
INDECENT BEHAVIOR 4 HOME VIDEO
INNER ACTION HOME VIDEO
INNOCENCE BETRAYED HOME VIDEO
INSATIABLE WIVES HOME VIDEO
INVISIBLE HOME VIDEO
IRRESISTIBLE IMPULSE HOME VIDEO
JACK-O HOME VIDEO
JOHNNY MYSTO: BOY WIZARD HOME VIDEO
JOURNEY TO THE MAGIC CAVERN HOME VIDEO
JUNGLE BOOK, THE: SEARCH FOR THE LOST TREASURE HOME VIDEO
KILLER EYE, THE HOME VIDEO
KISS AND TELL TELEVISION
KISSING A DREAM HOME VIDEO
KRAA! THE SEA MONSTER HOME VIDEO
LA CUCARACHA TELEVISION
LADY IN BLUE HOME VIDEO
LAP DANCER HOME VIDEO
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LAST BATTLE FOR THE UNIVERSE HOME VIDEO
LAST PRODUCER, THE CABLE
LAST TIME I COMMITTED SUICIDE, THE THEATRICAL
L.I.P. SERVICE HOME VIDEO
LITTLE GHOST HOME VIDEO
LITTLE MISS MAGIC HOME VIDEO
LONG WEEKEND TELEVISION
LOVE ME TWICE HOME VIDEO
LOVE ME TWICE 2 HOME VIDEO
LOVER'S LEAP HOME VIDEO
LURED INNOCENCE TELEVISION
LURID TALES OF THE CASTLE QUEEN HOME VIDEO
LURKING FEAR HOME VIDEO
MAMBO CAFE THEATRICAL
MANDROID HOME VIDEO
MASSEUSE HOME VIDEO
MASSEUSE 3 HOME VIDEO
MAXIMUM REVENGE HOME VIDEO
MIAMI MODELS HOME VIDEO
MICROSCOPIC BOY, THE HOME VIDEO
MIDAS TOUCH, THE HOME VIDEO
MIDNIGHT CONFESSIONS HOME VIDEO
MIDNIGHT TEASE II HOME VIDEO
MIDNIGHT TEMPTATIONS HOME VIDEO
MIDNIGHT TEMPTATIONS II HOME VIDEO
MILO TELEVISION
MINDRIPPER, THE PAY CABLE
MISTRESS CLUB HOME VIDEO
MISTRESS OF SEDUCTION HOME VIDEO
MURDERCYCLE HOME VIDEO
MY SANTA, MY DAD HOME VIDEO
MYSTERIOUS MUSEUM HOME VIDEO
MYSTERY MONSTERS HOME VIDEO
NAKED SOULS HOME VIDEO
NEMESIS-CRY OF ANGELS HOME VIDEO
NIGHTMARE STREET TELEVISION
NOOSE THEATRICAL
O LITA 2000 HOME VIDEO
OBLIVION HOME VIDEO
ONE HELL OF A GUY TELEVISION
ONE MAN'S HERO THEATRICAL
PASSION'S DESIRE HOME VIDEO
PASSION OBSESSION HOME VIDEO
PERFECT GETAWAY TELEVISION
PETTICOAT PLANET HOME VIDEO
PHANTOM LOVE HOME VIDEO
PHANTOM TOWN HOME VIDEO
PHOENIX THEATRICAL
PICKING UP THE PIECES THEATRICAL
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PINOCCHIO, THE ADVENTURES OF THEATRICAL
PLANET OF THE DINO-KNIGHTS HOME VIDEO
PLANET PATROL HOME VIDEO
PLEASURE IN PARADISE HOME VIDEO
PLEASURECRAFT HOME VIDEO
POSSUMS HOME VIDEO
POWDER BURN HOME VIDEO
PRELUDE TO LOVE HOME VIDEO
PRIVATE LESSONS II HOME VIDEO
PRIVATE OBSESSION HOME VIDEO
PROFESSIONAL AFFAIR HOME VIDEO
RAPID ASSAULT HOME VIDEO
REBECCA'S SECRET HOME VIDEO
RED RIBBON BLUES PAY CABLE
RETRO-PUPPETMASTER HOME VIDEO
RINGMASTER THEATRICAL
SAVIOR THEATRICAL
SCORING HOME VIDEO
SECRET KINGDOM, THE HOME VIDEO
SEDUCTION OF INNOCENCE HOME VIDEO
SENSATIONS HOME VIDEO
SENSUOUS SUMMER, A HOME VIDEO
SERPENT'S LAIR PAY CABLE
SEXUAL IMPULSE HOME VIDEO
SEXUAL ROULETTE HOME VIDEO
SHADOWDANCER HOME VIDEO
SHANDRA: THE JUNGLE GIRL HOME VIDEO
SHAPESHIFTER HOME VIDEO
SHOOTER, THE PAY CABLE
SHRIEK HOME VIDEO
SHRUNKEN CITY, THE HOME VIDEO
SHRUNKEN HEADS HOME VIDEO
SINFUL INTRIGUE HOME VIDEO
SKYJACKED TELEVISION
SMOOTH TALKER TELEVISION
SPIRIT OF THE NIGHT HOME VIDEO
ST. FRANCISVILLE EXPERIMENT, THE THEATRICAL
STOLEN HEARTS HOME VIDEO
STORM SWEPT HOME VIDEO
STORMY NIGHTS HOME VIDEO
STREET LAW HOME VIDEO
STRIPSHOW HOME VIDEO
SUBSPECIES: THE AWAKENING HOME VIDEO
SUSAN'S PLAN PAY CABLE
SWING THEATRICAL
TALISMAN HOME VIDEO
TARGET OF SEDUCTION HOME VIDEO
TAXMAN THEATRICAL
TEEN KNIGHT HOME VIDEO
</TABLE>
<PAGE>
<TABLE>
<S> <C>
TEEN SORCERY HOME VIDEO
TEEN TASK FORCE HOME VIDEO
TEENAGE SPACE VAMPIRES HOME VIDEO
TEST TUBE TEENS FROM THE YEAR 2000 HOME VIDEO
THE BRAVE TELEVISION
THE KIDNAPPING TELEVISION
THE LAST LIE TELEVISION
THE POET TELEVISION
THE STAIRCASE TELEVISION
TIMEGATE: TALES OF THE SADDLE TRAMPS HOME VIDEO
TOTALLY EXPOSED HOME VIDEO
TRAINSPOTTING THEATRICAL
TRAPPED ON TOY WORLD HOME VIDEO
TROPICAL TEASE HOME VIDEO
ULTIMATE TABOO HOME VIDEO
UNDER LOCK AND KEY HOME VIDEO
UNDER THE GUN HOME VIDEO
UNINHIBITED HOME VIDEO
UNWED FATHER TELEVISION
VAMPIRE JOURNALS HOME VIDEO
VERONICA 2030 HOME VIDEO
VERY BAD THINGS THEATRICAL
VICE GIRLS HOME VIDEO
VIRGINS OF SHERWOOD FOREST HOME VIDEO
VIRTUAL DESIRE HOME VIDEO
VIRTUAL ENCOUNTERS HOME VIDEO
VIRTUAL ENCOUNTERS II HOME VIDEO
VOYEUR, THE HOME VIDEO
WAGER OF LOVE HOME VIDEO
WAITING FOR SUNSET PAY CABLE
WAITING FOR THE MAN PAY CABLE
WHOLE WIDE WORLD THEATRICAL
WITCHOUSE HOME VIDEO
X-RAY KID, THE HOME VIDEO
YOUNGER & YOUNGER THEATRICAL
ZARKORR! THE INVADER HOME VIDEO
ZORRITA: PASSION'S AVENGER HOME VIDEO
</TABLE>
Television Movies and Mini-Series
<TABLE>
<CAPTION>
Title First Exhibition
----------------------------------------------------------------------
<S> <C>
A Husband, A Wife and A Lover CBS
Aladdin International
Candles in the Dark Family Channel
Carolina Skeletons NBC
Child in the Night CBS
City Boy CBS
Confessions: Two Faces of Evil NBC
Dangerous Intentions CBS
Echo ABC
Every Woman's Dream CBS
Family Pictures (4 hours) ABC
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Father and Son: Dangerous Relations NBC
Fire in the Dark CBS
Getting Gotti: The Diane Giacalone Story CBS
Glory Years (6 hours) HBO
Good Cops, Bad Cops NBC
Innocent Victims (4 hours) NBC
Jack Reed: A Search For Justice NBC
Jack Reed: A Killer Amongst Us NBC
Jack Reed: Death and Vengeance NBC
JFK: Reckless Youth (4 hours) ABC
Kiss Shot CBS
Lady Killer CBS
Liberace: Behind the Music CBS
Murder C.O.D. NBC
Overruled NBC
Princess in Love CBS
Sins of the Mother CBS
Sweet Bird of Youth NBC
Then There Were Giants (4 hours) NBC
To Save the Children CBS
Unlikely Angel CBS
Your Mother Wears Combat Boots NBC
</TABLE>
Television Series/Game Shows
<TABLE>
<CAPTION>
Title Episodes Produced First Exhibition
---------------------------------------------------------------------------
<S> <C> <C>
1st and Ten 80 HBO
Could It Be a Miracle 24 Syndication
Cracker 16 ABC
Erotic Confessions 39 HBO
Gun 6 ABC
Harts of the West 15 CBS
Heroes: Made in the USA 38 Syndication
Mapletown 39 Syndication
Mike Hammer 26 Syndication
Mowgli: The New Adventures
of The Jungle Book 26 Fox Kids Worldwide
Pigasso's Place 13 Syndication
Profiles-Unauthorized Biographies 4 A&E
Relatively Speaking 90 Syndication
Sweating Bullets 66 CBS
Teen Wolf 21 CBS
The Barbara De Angelis Show 70 CBS
Trial Watch 118 NBC
Would You Believe It? 13 Discovery Channel
</TABLE>
A significant portion of the Company's library is under license in many
of the major domestic and international markets. Following the
expiration of the licenses, rights generally revert to the Company for
relicensing.
Joint Ventures and Ancillary Activities
The Company has expanded into areas which exploit the characters and
story ideas in its feature films and television programs through joint
ventures and partnerships. The Company markets the music used in its
productions through an arrangement with Cherry Lane Music, Inc., a
music publisher. Using its expertise as a television producer, the
Company produced two infomercials for its 50% owned partnership
TVFirst. TVFirst markets recorded Christian music sung by contemporary
Christian artists. From October 1995 through September 1999 music
revenues have exceeded $12,900,000. The Company sold its interest in
TVFirst in October 1999.
The Company currently holds 50% ownership interests in BLT Ventures,
which produced the two sequels to the animated feature Brave Little
Toaster, Cracker Company LLC, which produced the network television
series Cracker, Swing Ventures, which produced the feature Swing, Trick
Productions which produced the feature Freeway II: Confessions of A
<PAGE>
Trickbaby, and a 25% interest in Grendel Productions LLC, which
produced the feature Beowulf.
The Company currently holds a 55.2% ownership interest in US
SEARCH.com, an 82.5% ownership interest in KLC/New City, and an 80%
ownership interest in Gran Canal Latino, each as previously described.
Competition
In the film and television program business, the Company competes
against many vertically integrated production and distribution
businesses that have substantially greater resources than the Company,
and smaller independent companies of a similar size to the Company.
See "Motion Picture Industry Overview" above and "Government
Regulations" below. Due to the artistic quality of the product
produced, consumer acceptance of individual productions rather than
distributor brand name tend to generate revenues.
The individual reference service industry is highly competitive and
highly fragmented. Currently, US SEARCH.com's primary competitors in
the area of individual locator searches include major telephone
companies and other third parties who publish free printed or
electronic directories, private investigation firms and a variety of
other companies. Their primary competitors for individual profile
report search services include these companies, as well as LEXIS-NEXIS,
a division of Reed Elsevier Inc., The Dun & Bradstreet Corporation,
Reuters Limited, Avert, Inc., Choice Point, KnowX.com, a division of
DBT Online, inc., the primary data supplier to US SEARCH.com, The
Kroll-O'Gara Company, Pinkerton and the Proudfoot Reports Division of
ASI Solutions, Inc. Many of these companies have greater financial and
marketing resources than US SEARCH.com does and may have significant
competitive advantages through other lines of business and existing
business relationships. US SEARCH.com also competes with online
services and other Web site operators, as well as traditional media
such as television, radio and print for a share of advertisers' total
advertising space or programs. US SEARCH.com does not presently
consider major Internet search directories or Web sites as competitors.
In fact, US SEARCH.com views them as lead generators through their
search directories and other services, and presently benefits from
strategic advertising arrangements with several of the major Internet
portals and Web sites. However, there is no guarantee that these Web
sites, many of which have financial and other resources greater than
those of US SEARCH.com will not acquire businesses that compete with or
introduce new products and services in direct competition with US
SEARCH.com. More generally, competitors or potential competitors of US
SEARCH.com may develop services that are superior, are less expensive
or achieve greater market acceptance.
Business Concentration and Dependence
The Company conducts its film and television business world-wide, with
no concentrations in one or a few geographic areas, or to one or a few
individual customers the loss of whom would materially adversely affect
Company results.
Government Regulations
The United States Federal Communications Commission ("FCC") repealed
its financial interest and syndication rules in September 1995. Those
FCC rules, which had been adopted in 1970 to limit television network
control over television programming and thereby foster the development
of diverse programming sources, restricted the ability of U.S.
television networks ABC, CBS and NBC to own and syndicate television
programming. As a result of the repeal of the FCC's financial interest
and syndication rules, there has been an increase in internal
television network production of programming for their own use. This
has placed additional competitive pressures on program suppliers, such
as the Company.
Under the Telecommunications Act of 1996 (the "1996 Act"),
manufacturers of television set equipment are required to equip all new
television receivers with a so-called "V-Chip" which allows for
parental blocking of violent, sexually-explicit or indecent programming
based on a rating for any given program that is broadcast along with
the program. The FCC was directed by the 1996 Act to develop a ratings
system based upon the recommendations of an advisory committee selected
by the FCC unless the television industry established its own voluntary
ratings system by February 1997. The majority of the television
networks did establish and have implemented such a system. Other
provisions of the 1996 Act revise the broadcast multiple ownership
rules, allow local exchange telephone companies to offer multichannel
video programming
<PAGE>
service, subject to certain regulatory requirements, and allow for
cable companies to offer local exchange telephone service, subject to
certain regulatory requirements.
The full impact on the Company of the changes brought about by the 1996
Act, including the new content ratings guidelines and accompanying
changes in FCC rules cannot be predicted at the present time. However,
it is possible that recent alliances of certain program producers and
television station group owners may place additional competitive
pressures on program suppliers, such as the Company, to the extent they
are unaligned with the major networks or any television station group
owners. These alliances have been further encouraged by recent FCC
rule revisions which permit greater consolidation of ownership of
television stations on the national level by allowing a single
television station licensee to own television stations reaching up to
35% of the nation's television households and which permit a single
owner to own two television stations in a single market.
The FCC has also adopted rules that require certain programs to be
broadcast with closed captioning for the hearing impaired and the
Company may have to make additional closed-captioning expenditures to
ensure the value of its library for television licensing. Further, the
FCC is considering a proposal to require that programs be accompanied
by a video description of settings and actions not otherwise in the
dialogue for the visually impaired which may result in the Company
being required to further enhance its library for future television
licensing.
Recently enacted legislation requires direct broadcast satellite
operators to carry certain local broadcast channels. Such legislation
may limit the number of pay-per-view and other niche channels available
for the Company's programming.
The FCC is considering whether to compel cable systems to carry all the
digital signals that a local station broadcasts. Since local stations
will be able to broadcast multiple signals, this may result in
decreased availability of open cable channels for pay-per-view and
other niche channels. If this occurs, the Company may face increased
competition for a limited supply of pay-per-view and other niche
channels for distribution.
In international markets, the Company's programming is occasionally
subject to domestic content and quota requirements, and/or other
limitations, which prohibit or limit the amount of programming produced
outside of the local market. Although the Company believes these
requirements have not affected the Company's licensing of its programs
in international markets to date, such restrictions, or new or
different restrictions, could have an adverse impact on the Company's
operations.
In connection with certain services provided or intended to be provided
by US SEARCH.com, particularly individual background checks used for
certain purposes, US SEARCH.com may be considered a "consumer reporting
agency" as such term is used in the Fair Credit Reporting Act, as
amended ("FCRA"), and, therefore, may be required to comply with the
various consumer credit disclosure requirements of the FCRA. While US
SEARCH.com intends to comply with the FCRA as a "consumer reporting
agency" in connection with providing individual background checks for
employment purposes, the procedures which are implemented by the
Company may be deemed to be insufficient. In addition, US SEARCH.com's
limited procedures to date to avoid being regulated as a consumer
reporting agency by attempting to restrict its individual background
check service to permissible purposes (which do not permit use for
employment purposes), may not be sufficient. Willful or negligent
noncompliance with the FCRA, including with respect to US SEARCH.com's
prior operations, could result in civil liability to the subjects of
reports. Also, the Americans with Disabilities Act of 1990 ("ADA")
contains pre-employment inquiry and confidentiality restrictions
designed to prevent discrimination against individuals with
disabilities in the hiring process. The use by US SEARCH.com's
customers of certain information sold to them is also regulated, both
in respect to the type of information and the timing of its use by the
ADA. Similarly, there are a number of states which have laws similar
to the FCRA, and some states which have laws more restrictive than the
ADA. Further, many state laws limit the type of information which can
be made available to the public. In addition, certain state laws may
require US SEARCH.com to be licensed in order to conduct its background
check business within those states. Customers in such states can
access US SEARCH.com's Web site, which may subject US SEARCH.com to the
laws of such states. There is no assurance that US SEARCH.com will not
be subject to the laws of states in which US SEARCH.com has no contacts
other than through residents of such state ordering services through US
SEARCH.com's Web site and US SEARCH.com mailing, faxing or e-mailing
reports to the resident within such state. In the event US SEARCH.com
is determined to have
<PAGE>
violated any of the federal or state laws referred to herein, US
SEARCH.com could be subject to substantial civil and/or criminal
liability which could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects.
Employees
The Company and its subsidiaries had approximately 265 full-time and 45
part-time employees as of December 10, 1999. The Company's executive
offices are located at 11601 Wilshire Boulevard, Suite 2100, Los
Angeles, California 90025, and its telephone number is (310) 481-2000.
The Company has employment contracts with certain key executives due to
its reliance upon them for critical functions. The Company relies upon
the personal contacts of its senior officers which have been generated
through their prior business and personal dealings with Majors, other
Independents, legal and accounting firms, business management firms,
talent agencies, production lenders and personal managers who are
actively involved in the production community. No employees of the
Company are represented by unions, although staff temporarily employed
for specific film and television program productions are often so
represented. Management believes that employee relations are wholly
satisfactory.
2. Properties
The Company leases approximately 23,000 square feet of office space on
the 20th and 21st floors at 11601 Wilshire Boulevard, Los Angeles,
California under a lease agreement recently extended through June 2005.
The minimum annual rent under the lease currently is $528,000 but will
increase in fiscal 2000 and beyond. The Company's subsidiary, US
SEARCH.com, leases approximately 8,000 square feet of office space in
Beverly Hills, California under a lease agreement through February
2000. The minimum annual rent under the lease is $188,000. US
SEARCH.com recently entered into a five year lease for approximately
52,500 square feet of office space in Marina Del Rey, California
commencing in December 1999. The minimum annual rent under that lease
will be $1,006,000.
The Company rents studio facilities as needed for production, except
that certain post-production off-line editing is performed at the
Company's executive offices.
3. Legal Proceedings
The Company is party to certain legal proceedings and claims arising
out of the normal course of business. The Company believes that the
ultimate resolution of all of these matters will not have a material
adverse effect upon the Company's financial position, results of
operations or liquidity.
4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is quoted on the NASDAQ National Market
("NNM") under the symbol "KLOC." Additionally, the stock is listed on
the Pacific Stock Exchange under the symbol "KLO." The following table
sets forth the range of high and low sale prices for the Common Stock,
as reported on the NNM, for the periods indicated:
<TABLE>
<CAPTION>
Common Stock High Low
------------ --------------------
<S> <C> <C>
Fiscal 1998
First Quarter (ended December 31, 1997) $5.25 $2.44
Second Quarter (ended March 31, 1998) $3.19 $1.75
Third Quarter (ended June 30, 1998) $3.78 $1.75
Fourth Quarter (ended September 30, 1998) $5.13 $2.44
Fiscal 1999
First Quarter (ended December 31, 1998) $8.38 $1.63
Second Quarter (ended March 31, 1999) $16.00 $7.00
Third Quarter (ended June 30, 1999) $21.63 $4.88
Fourth Quarter (ended September 30, 1999) $8.75 $3.03
Fiscal 2000
First Quarter (through December 14, 1999) $5.63 $3.56
</TABLE>
On December 14, 1999, the last sale price for the Common Stock as
reported on the NNM was $3.97. On November 30, 1999, there were
approximately 596 record holders.
Recent Sales of Unregistered Securities; Uses of Proceeds
None.
Dividends
The Company has never paid any cash dividends and has no present
intention to declare or to pay cash dividends. The payment of
dividends also is restricted by covenants in the Company's credit
agreement and the indentures and fiscal agency agreements under which
the Company's Convertible Subordinated Debentures were issued. It is
the present policy of the Company to retain any earnings to finance the
growth and development of the Company's business.
6. Selected Financial Data
The following table summarizes selected consolidated financial data for
the Company and should be read in conjunction with the detailed
consolidated financial statements included elsewhere in this Annual
Report. The selected consolidated financial data for the fiscal years
are derived from the consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent public accountants, whose
report with respect to the consolidated balance sheets of the Company
as of September 30, 1999 and 1998, and the related consolidated
statements of operations, cash flows and stockholders' equity for the
years ended September 30, 1999 and 1998, and by KPMG LLP, independent
public accountants, whose report with respect to the consolidated
statements of operations, cash flows and stockholders' equity of the
Company for the year ended September 30, 1997 each appears elsewhere in
this Annual Report. On October 20, 1998, the Company changed its
independent public accountants.
<PAGE>
Condensed Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
(in thousands, except per share data)
1999(1) 1998(1) 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues $49,890 $76,130 $54,746 $80,157 $20,407
Costs relating to operating
revenues (39,666) (61,627) (52,084) (70,648) (17,404)
Selling, general and administrative
expenses (31,186) (12,028) (4,023) (3,096) (3,388)
Provision for doubtful accounts. (2,959) (2,118) (1,310) (499) (450)
------- ------- ------- ------- -------
Earnings (loss) from operations (23,921) 357 (2,671) 5,914 (835)
Equity in earnings (losses) of
unconsolidated entities (520) (330) 2,189 -- --
Gain on sale of interest in
subsidiary 13,148 -- -- -- --
Gain on issuance of stock by
subsidiary 21,018 -- -- -- --
Interest and dividend income 687 79 163 198 300
Interest expense (7,782) (6,261) (4,027) (4,027) (3,409)
Interest expense related to bridge
note financing -- -- -- (943) --
------- ------- ------- ------- -------
Earnings (loss) before minority
interest, income taxes and
extraordinary item 2,630 (6,155) (4,346) 1,142 (3,944)
Minority interest in subsidiary
net losses 2,567 -- -- -- --
------- ------- ------- ------- -------
Earnings (loss) before income
taxes and extraordinary item 5,197 (6,155) (4,346) 1,142 (3,944)
Income taxes (726) (181) (23) (47) (31)
------- ------- ------- ------- -------
Earnings (loss) before
extraordinary item 4,471 (6,336) (4,369) 1,095 (3,975)
Extraordinary item: costs
associated with repayment of
credit facility -- -- -- (365) --
------- ------- ------- ------- -------
Net earnings (loss) $4,471 ($6,336) ($4,369) $730 ($3,975)
======= ======= ======= ======= =======
Basic earnings (loss) per
share (2):
Before extraordinary item $.38 ($.69) ($.49) $.16 ($.75)
Extraordinary item -- -- -- (.05) --
------- ------- ------- ------- -------
Net earnings (loss) $.38 ($.69) ($.49) $.11 ($.75)
======= ======= ======= ======= =======
Diluted earnings (loss) per
share (2):
Before extraordinary item $.36 ($.69) ($.49) $.16 ($.75)
Extraordinary item -- -- -- (.05) --
------- ------- ------- ------- -------
Net earnings (loss) $.36 ($.69) ($.49) $.11 ($.75)
======= ======= ======= ======= =======
Weighted average common shares
outstanding (2) 11,755 9,181 8,959 6,668 5,286
======= ======= ======= ======= =======
</TABLE>
Condensed Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
(In thousands)
1999(1) 1998(1) 1997 1996 1995
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents (3). $36,434 $3,309 $16,791 $11,636 $4,301
Accounts receivable, net 30,030 40,418 27,696 22,885 7,864
Film and television program
costs, net 91,499 73,773 68,507 58,463 73,716
Investments in unconsolidated
subsidiaries 12,045 10,798 5,326 1,495 --
Total assets 185,115 137,105 124,368 100,152 88,952
Notes payable and other
indebtedness 85,194 84,677 74,278 53,520 46,143
Total liabilities 112,790 111,639 93,232 65,902 69,745
Stockholders' equity 60,745 25,466 31,136 34,250 19,207
======= ======= ======= ======= =======
</TABLE>
(1) In November 1997 the Company acquired a controlling interest in US
SEARCH.com. In June 1999 US SEARCH.com completed an initial public
offering in which the Company sold a portion of its shareholdings as
well. Because US SEARCH.com has incurred net
<PAGE>
losses since acquisition and the Company funded 100% of such losses
through its initial public offering, the Company recognized 100% of
those incurred net losses in its consolidated financial statements
through June 1999. Subsequent to the public offering, the Company has
recognized in its consolidated balance sheet a minority interest in the
net equity of US SEARCH.com, and has recognized in its consolidated
statements of operations a minority interest in the net losses of US
SEARCH.com proportionate to the minority ownership. In April 1999 the
Company acquired a minority interest in The Harvey Entertainment
Company.
(2) In September 1997 the Company effected a 1-for-6 reverse stock
split. Amounts for all periods presented herein give retroactive
effect to the reverse split.
(3) $2,088 of cash and cash equivalents are restricted deposits that
are collateral for a sale/leaseback transaction and for certain
production loans for 1999 ($1,988 for 1998, $1,609 for 1997, $419 for
1996 and $1,162 for 1995), $2,000 of cash and cash equivalents for 1999
are restricted deposits of subsidiary US SEARCH.com, and $734 is cash
collected by the Company and reserved for use by Chase Manhattan Bank
to pay down outstanding borrowings under the Company's credit facility
($66 for 1998, $105 for 1997, $4,126 for 1996 and none for 1995).
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's revenues are derived primarily from the production or the
acquisition of distribution rights in films licensed for release
domestically; from the production and distribution of television
programming for the major domestic television networks, basic and pay
cable television and first-run syndicators; and from the licensing of
rights to films and television programs in international markets.
Major domestic television networks are reducing the volume of
independently produced television programming. The Company generally
finances all or a substantial portion of the budgeted production costs
of films and television programming it produces through advances
obtained from distributors and borrowings secured by domestic and
international licenses. The Company typically retains rights to be
exploited in future periods or in additional markets or media. The
Company produces a limited number of higher-budget theatrical films to
the extent the Company is able to obtain an acceptable domestic studio
to release the film theatrically in the U.S. In November 1997, the
Company acquired control of US SEARCH.com, Inc., a leading provider of
fee-based people search and other customized individual reference
services. In February 1998 the Company established KL/Phoenix, an 80%
owned venture, which distributes film and television product in Latin
America. In November 1998 the Company established Gran Canal Latino,
an 80% owned venture which broadcasts Spanish and Portuguese language
programming in the Americas.
The Company's revenues and results of operations are significantly
affected by accounting policies required for the industries in which it
operates (see Note 1 of Notes to Consolidated Financial Statements).
Among the more significant policies are the following:
Film and Television Programs. The Company generally capitalizes the
costs it has incurred to produce a film or television program. These
costs include direct production expenditures, certain exploitation
costs, production overhead, and interest relating to financing the
project. Capitalized exploitation or distribution costs include those
costs that clearly benefit future periods such as film prints and
prerelease and early release advertising that is expected to benefit
the film or program in future markets. These costs, as well as third
party participations and talent residuals, are amortized each period on
an individual film or television program basis in the ratio that the
current period's gross revenues for the program bear to management's
estimate of anticipated total remaining gross revenues for such film or
program from all sources. When management reduces its estimates of the
future gross revenues for a particular product, a significant write-
down and a corresponding decrease in the Company's earnings could
result. See "Results of Operations" Below. Film and television
program costs, net of accumulated amortization, increased to
$91,499,000 at September 30, 1999 from $73,773,000 at September 30,
1998. Film and television program costs in process or development at
September 30, 1999 increased to $20,472,000 from $10,570,000 at
September 30, 1998. See "Results of Operations - Comparison of Fiscal
Years Ended September 30, 1999 and 1998" below.
Gross profits for any period are a function, in part, of the number of
programs delivered in that period and the recognition of costs in that
period. Because initial licensing revenues and related costs generally
are recognized either when the program
<PAGE>
has been delivered or is available for delivery, significant
fluctuations in revenues and net earnings may occur from period to
period. Thus, a change in the amount of entertainment product
available for delivery from period to period may materially affect a
given period's revenues and results of operations and year-to-year
results may not be comparable. The continuing shift of the Company's
film and television program mix during a fiscal year may further affect
the Company's quarter-to-quarter or year-to-year results of operations
as new products may be amortized differently as determined by length of
product life cycle and the number of related revenue sources.
Distributor production advances or license fees received prior to
delivery or completion of a program are deferred. License fees are
generally recognized as revenue on the date the film or program is
delivered or available for delivery. Activities conducted through
joint ventures, wherein the Company reports its equity in earnings
(losses) as revenues, can significantly affect comparability of net
earnings. See "Results of Operations" below.
US Search.com. In November 1997, the Company acquired an 80% interest
of US SEARCH.com, a leading provider of fee-based people search and
other customized individual reference services. In June 1999 the
Company sold shares of US SEARCH.com and US SEARCH.com completed an
initial public offering which resulted in the Company's ownership
position declining to 55.2%. Since its acquisition, US SEARCH.com's
financial position and results of operations have been consolidated in
the Company's financial statements. The consolidation of Search has
resulted in a substantial change in the presentation of the Company's
results of operations due to the inclusion of this new business
segment. Since such acquisition, the Company has consolidated
$23,616,000 of revenues and $16,078,000 of net losses attributable to
US SEARCH.com. US SEARCH.com has significantly higher gross profit
margins than the film and television program segment. Management's
strategy is to enhance US SEARCH.com's brand awareness and market
position through increased advertising and distribution and marketing
alliances. As an expected result of increases in revenues trailing
such increases in expenditures, the Company believes that US SEARCH.com
will continue to adversely affect the Company's consolidated results of
operations for the foreseeable future. See Note 10 of Notes to
Consolidated Financial Statements.
Gran Canal Latino. In November 1998, the Company launched Gran Canal
Latino ("GCL"), its first satellite channel. GCL broadcasts 24 hours a
day, with a selection of films mostly from Spain. GCL's satellite
transmission reaches the United States and all of Latin America
including Mexico. Through November 30, 1999, GCL's cable distributors
had a base of 1,300,000 subscribers including its multiple system
operators. Under a distribution agreement with Enrique Cerezo, the
Company is broadcasting selections from approximately 1,500 Spanish
language movie titles.
Results of Operations
Comparison of Fiscal Years Ended September 30, 1999 and 1998
The following tables provide the dollar and percentage changes in
operating results by segment and in total for fiscal 1999 versus fiscal
1998:
<TABLE>
<CAPTION>
$000 %
----------------------------- ------------------------
Film Film
and TV Search Consol. and TV Search Consol.
--------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ($34,118) $7,878 ($26,240) (50)% 100% (34)%
Costs relating to
operating revenues ($24,812) $2,851 ($21,961) (43)% 79% (36)%
Gross profit ($9,306) $5,027 ($4,279) (91)% 118% (30)%
Selling, general and
administrative expenses $4,168 $14,990 $19,158 91% 202% 159%
Provision for doubtful
accounts $390 $451 $841 28% 61% 40%
Earnings (loss) from
operations ($13,864) ($10,414) ($24,278) NM 268% NM
</TABLE>
___________________________________
NM - not meaningful
The Company's operating revenues for fiscal 1999 decreased
($26,240,000) (34%) from fiscal 1998. The decrease resulted from a
($34,118,000) or (50%) decline in film and television licensing
revenues due primarily to a decline in the
<PAGE>
delivery and/or availability of films and television programs.
Television program revenues declined $18,000,000 as episodic deliveries
to networks concluded in fiscal 1998. Also seven larger feature films
were delivered during fiscal 1999 in comparison to 25 moderate-sized
feature films delivered or available in fiscal 1998. Partially
offsetting this decrease was a $7,878,000 or 100% increase in revenues
from US SEARCH.com versus 1998. This increase was attributable to
increased marketing and advertising expenditures. See Note 10 to the
consolidated financial statements for revenue information by territory
and for significant customers.
The Company recognized $15,747,000 (32%) of revenues during the fiscal
1999 from US SEARCH.com. The Company recognized $14,081,000 (28%) of
revenues during the fiscal 1999 from the delivery and/or availability
of seven feature films, including Ringmaster, starring Jerry Springer
which was released in the United States by Artisan Entertainment, and
One Man's Hero starring Tom Berenger, which was released in the United
States by MGM. The Company recognized $11,548,000 (23%) of revenues in
fiscal 1999 from continuing licenses of product from the Company's
library to domestic cable channel operators through its majority-owned
subsidiary KLC/New City, and through international sub-distributors
including KL/Phoenix. Revenues of $6,878,000 (14%) came from
television feature or pilot productions. Revenues of $1,135,000 (2%)
came from producer fees on third party productions. Revenues of
$1,306,000 (3%) came from deliveries in the Company's family division
of direct-to-video product.
In various stages of production for the Company's fiscal 2000
distribution slate are Picking Up The Pieces starring Woody Allen, The
St. Francisville Experiment, They Nest starring Dean Stockwell, John
Savage and Thomas Calabro, and Vlad the Impaler.
Costs relating to operating revenues during fiscal 1999 decreased
($21,961,000) (36%) as compared to fiscal 1998. As a percentage of
operating revenues, costs relating to operating revenues were 80% for
fiscal 1999 in comparison to the 81% rate for fiscal 1998. Film and
television costs declined 43%, which was less than the revenue decline
principally because management reduced its estimates of likely future
revenues on several released titles in fiscal 1999. US SEARCH.com
costs increased 79%, which was less than the revenue increase as
Internet-sourced revenues were less costly to provide to consumers.
Gross profit during fiscal 1999 decreased ($4,279,000) (30%) from
fiscal 1998. As a percentage of operating revenues, gross profit was
20% for fiscal 1999, slightly more than the 19% rate for fiscal 1998.
Film and television gross profit amounts declined 91%, principally due
to reduced operating revenues and management reducing its estimates of
likely future revenues on several released titles in fiscal 1999. US
SEARCH.com gross profit amounts increased 118%, as Internet-sourced
revenues were less costly to provide to consumers.
Selling, general and administrative expenses increased $19,158,000 or
159% for fiscal 1999 from fiscal 1998. The increase in such expenses
is principally due to a $10,392,000 (200%) increase in US SEARCH.com
advertising expenses and a $3,392,000 (122%) increase in US SEARCH.com
administrative expenses. As a percentage of US SEARCH.com's net
revenues, advertising and marketing expenses increased to approximately
99% for fiscal 1999, from approximately 67% for fiscal 1998. This
increase is primarily attributable to an increase in the level of
Internet-based advertising. As a percentage of net revenues, general
and administrative expenses increased to approximately 64% for fiscal
1999, from approximately 16% for fiscal 1998. This increase in general
and administrative expenses in absolute dollars is primarily
attributable to the cost associated with the hiring of additional
management and administrative personnel in 1999. Also included in US
SEARCH.com's 1999 selling, general and administrative expenses is
$1,834,000 of US SEARCH.com non-cash director and officer stock option
costs in connection with options granted in fiscal 1999. No options
were granted in fiscal 1998. Also included in fiscal 1999 expenses are
$1,499,000 of bonuses to the Co-Chairmen and Co-Chief Executive
Officers, the President and Chief Operating Officer, and the Chief
Financial Officer. A $50,000 bonus to the President and Chief
Operating Officer was included in fiscal 1998 expenses.
The provisions for doubtful accounts increased $841,000 or 40% during
fiscal 1999 principally due to a $390,000 increase in such provisions
for film and television license receivables based upon estimated
collections, and a $451,000 increase in such provisions for US
SEARCH.com. The US SEARCH.com increase is primarily due to increases
in the accruals for potential chargebacks regarding uncollectible
consumer checks, credit card charges and 900 number
<PAGE>
telephone sales.
During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on
the issuance of stock by its subsidiary, US SEARCH.com. This resulted
from the subsidiary's initial public offering on June 25, 1999, in
which new shareholders invested an amount per share substantially in
excess of the Company's per-share investment in the subsidiary,
resulting in a substantial increase in the subsidiary's net worth. The
gain represents the increase in the Company's revised proportionate
share of the subsidiary's net equity. No comparable transaction
occurred in fiscal 1998.
During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on
sale to the public of 1,500,000 shares of its holdings in its
subsidiary US SEARCH.com in conjunction with the initial public
offering by the subsidiary. No comparable transaction occurred in
fiscal 1998.
Interest and dividend income increased $608,000 (770%) during fiscal
1999 due to earnings on invested proceeds from the US SEARCH.com
initial public offering and dividends received from the investment in
The Harvey Entertainment Company during fiscal 1999.
Interest expense during fiscal 1999 increased $1,521,000. The 24%
increase was principally attributable to the increased average levels
of borrowing in fiscal 1999 and an increase in the average interest
rate. Total indebtedness for borrowed money increased 1% to
$85,194,000 at September 30, 1999 from $84,677,000 at September 30,
1998.
Earnings before income taxes of $5,197,000 were reported for fiscal
1999, versus a loss before income taxes of ($6,155,000) for fiscal
1998.
The Company's effective income tax rate was 13% for fiscal 1999
compared to an effective income tax rate of 3% for fiscal 1998. Income
tax expense for fiscal 1999 consisted of alternative minimum taxes and
state income taxes. Through September 30, 1999 the Company and US
SEARCH.com had combined estimated Federal and state net operating loss
carryforwards totaling $35,368,000 and $9,198,000, respectively. The
Federal net operating loss carryforwards begin to expire in fiscal
2008. The state net operating loss carryforwards begin to expire in
fiscal 2004. Due to the sale of US SEARCH.com common stock in
connection with the subsidiary's initial public offering in June 1999,
effective July 1999 US SEARCH.com taxable income or loss will not be
consolidated in the Company's income tax returns. As a result, in
future periods taxable income or loss could vary significantly from
financial statement earnings or losses before income taxes.
The Company reported net earnings of $4,471,000, or $0.38 per basic
share and $0.36 per diluted share, for fiscal 1999 as compared to a net
loss of ($6,336,000), or losses of ($0.69) per basic and diluted share,
for fiscal 1998. Weighted number of common shares for the compared
year were 11,755,000 (basic) and 12,696,000 (diluted) in fiscal 1999
and 9,181,000 (basic and diluted) in fiscal 1998.
Comparison of Fiscal Years Ended September 30, 1998 and 1997
The following tables provide the dollar and percentage changes in
operating results by segment and in total for fiscal 1998 versus fiscal
1997:
<TABLE>
<CAPTION>
$000 %
--------------------------- -----------------------
Film Film
and TV Search Consol. and TV Search Consol.
------- ------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $13,515 $7,869 $21,384 25% NM 39%
Costs relating to
operating revenues $5,954 $3,589 $9,543 11% NM 18%
Gross profit $7,561 $4,280 $11,841 284% NM 445%
Selling, general and
administrative expenses $574 $7,431 $8,005 14% NM 199%
Provision for doubtful
accounts $73 $735 $808 6% NM 62%
Earnings (loss) from
operations $6,914 ($3,886) $3,028 259% NM 113%
</TABLE>
_______________________
<PAGE>
NM - not meaningful
The Company's operating revenues for fiscal 1998 increased $21,384,000
(39%). This increase was due primarily to the timing of delivery
and/or availability of films and television programs, to the increase
during fiscal 1998 in revenues related to certain films previously
marketed by Conquistador and to the inclusion in fiscal 1998 of the
revenues of newly acquired US SEARCH.com.
The Company recognized $26,200,000 (34%) of revenues during the fiscal
year ended September 30, 1998 from the delivery and/or availability of
25 feature films, including Susan's Plan written and directed by John
Landis and starring Natassja Kinski, Billy Zane, Michael Biehn, Rob
Schneider, Lara Flynn Boyle and Dan Aykroyd, Black and White starring
Gina Gershon, Girl starring Dominique Swain, Taxman starring Joe
Pantoliano, Minion starring Dolph Lundgren, Noose directed by Ted
Demme, and Legion starring Parker Stevenson. Also included were the
Company's equity in net earnings of joint ventures which delivered
Beowulf starring Christopher Lambert, Swing starring Lisa Stansfield
and Hugo Speer, and Denial starring Jason Alexander and directed by
Adam Rifkin. In addition, the Company recognized $18,500,000 (24%) of
revenues from its television slate during fiscal 1998, including
revenues from the delivery and/or availability of the remaining
episodes of the first-run syndication series Hammer and Mowgli: The New
Adventures of The Jungle Boy, and the net earnings from the delivery by
a joint venture of the remaining episodes of the ABC network series
Cracker. Revenues of $4,300,000 (6%) came from deliveries of nine
films in the Company's family division of direct-to-video product. In
addition, the Company recognized $12,900,000 (17%) of revenues from
continuing licenses of product from the Company's library to domestic
cable channel operators through its majority-owned subsidiary KLC/New
City, and through international sub-distributors. Revenues of
$7,869,000 (10%) were recognized from delivery of people search
services by the recently acquired US SEARCH.com business. Remaining
revenues of approximately $6,000,000 (8%) came from the sales of
contemporary Christian music on behalf of a joint venture and from
other sources.
Costs relating to operating revenues for fiscal 1998 increased
$9,543,000 (18%). As a percentage of operating revenues, costs
relating to operating revenues were 81% for fiscal 1998 compared to 95%
for fiscal 1997. The decreased percentage in fiscal 1998 principally
reflects a change in the product mix. This principally includes the
effects in fiscal 1998 of consolidating $3,589,000 of Search costs
which were substantially less than the related consolidation of
$7,869,000 of Search revenues. The increase in gross profit margins
was partially offset by the inclusion in fiscal 1998 of $15,265,000 of
amortization expense pertaining to film titles produced by others which
were previously marketed by Conquistador Entertainment that are
expected to be less profitable than Company titles included in fiscal
1997 costs where the Company assumed greater risks.
Selling, general and administrative expenses for fiscal 1998 increased
$8,005,000 (199%). The increase in such expenses is due to inclusion
of $7,431,000 of advertising and administrative expenses of US
SEARCH.com (primarily $4,747,000 of advertising expenses), which was
acquired in fiscal 1998. In addition, the Company's new Latin American
operations, which commenced operations in the fiscal 1998 second
quarter, incurred $962,000 of administrative expenses during fiscal
1998 and none in fiscal 1997.
A $808,000 (62%) increase in the provision for doubtful accounts in
fiscal 1998 resulted principally from a deterioration in net expected
international collections.
Interest expense for fiscal 1998 increased $2,234,000 (55%). The
increase was principally attributable to the increased average levels
of borrowing in fiscal 1998, which was not offset by increased
production-related interest capitalized. Total indebtedness for
borrowed money increased 13% to $84,296,000 at September 30, 1998 from
$74,278,000 at September 30, 1997.
The Company's effective income tax rate was 3% for fiscal year 1998
compared to an effective income tax rate of 1% for fiscal 1997. Income
tax expense for fiscal 1998 consisted of minimum state income and
federal alternative minimum taxes.
The Company reported a net loss of ($6,336,000) ($0.69 per basic and
diluted share) for fiscal 1998 as compared to a net loss of
($4,369,000) ($0.49 per basic and diluted share) for the fiscal year
ended September 30, 1997. Weighted number
<PAGE>
of common shares for the compared fiscal years were 9,181,000 in 1998
and 8,959,000 in 1997. The fiscal 1998 net loss resulted primarily
from consolidating US SEARCH.com operations into the Company's
financial statements. In addition, the Company's film and television
business experienced a change in product mix in fiscal 1998, including
the release of low profit margin titles formerly distributed by
Conquistador which generated $15,689,000 of revenues but only $424,000
of gross profit.
Liquidity and Capital Resources
Cash and cash equivalents increased 1001% to $36,434,000 (including
$2,088,000 of restricted cash being used as collateral for film
sale/leaseback transactions, and $2,000,000 of restricted deposits of
subsidiary US SEARCH.com, and $734,000 of reserved cash to be applied
against the Company's outstanding borrowings under its credit facility)
at September 30, 1999 from $3,309,000 (including $1,988,000 of
restricted cash and $66,000 of reserved cash) at September 30, 1998
primarily resulting from proceeds obtained from the initial public
offering of US SEARCH.com.
The Company's film and television program operations, and operations
of US SEARCH.com are capital intensive. The June 1999 initial public
offering of US SEARCH.com financed that subsidiary's capital needs.
While the Company is not contractually obligated to finance US
SEARCH.com, from time to time the Company may consider doing so out of
its capital resources. The Company has funded its working capital
requirements through receipt of third party domestic and international
licensing payments as well as other operating revenues, and proceeds
from debt and equity financings, and has relied upon its line of credit
and transactional production loans to provide bridge production
financing prior to receipt of license fees. The Company funds
production and acquisition costs out of its working capital, including
the line of credit, and through certain pre-sale of rights in
international markets. In addition, the expansion of the Company's
international distribution business, the establishment of its feature
film division and its Internet and direct marketing subsidiary US
SEARCH.com have significantly increased the Company's working capital
requirements and use of related production loans. The amount available
under the credit facility as of December 17, 1999 was $3,906,000. The
Company experienced net negative cash flows of ($38,145,000) from
operating activities primarily resulting from the Company's operating
expenditures exceeding operating receipts at the Company and its
subsidiary US SEARCH.com. This was offset by net cash of $58,324,000
provided by financing activities from production loans, greater usage
of the Company's revolving line of credit, and receipt of proceeds from
the US SEARCH.com initial public offering. Net unrestricted cash
increased by $30,357,000 to $31,612,000 on September 30, 1999. On
December 16, 1999 the Company and its subsidiaries held more than
$23,000,000 in net unrestricted cash. As the Company expands
production and distribution activities and increases its debt service
burdens, it will continue to experience net negative cash flows from
operating activities, pending receipt of licensing revenues, other
revenues and sales from its library.
Credit Facility
In June 1996, the Company obtained a $40,000,000 syndicated revolving
credit facility with a group of banks led by The Chase Manhattan Bank
N.A. ("Chase"). A September 1997 amendment increased the maximum
amount of revolving credit to $60,000,000, and a December 1998
amendment increased the maximum amount of revolving credit to
$75,000,000, as discussed more fully below. The agreement provides for
borrowing by the Company on specified percentages of receivables and a
specified amount of the Company's appraised library value for unsold or
unlicensed rights. In addition, the Company may from time to time
allocate a production tranche in its line of credit for the Company's
productions. Such tranche will allow the Company to borrow production
funding after a required Company equity participation. Loans made
pursuant to such agreement are secured by substantially all of the
Company's otherwise unencumbered assets and bear interest, at the
Company's option, either (i) at LIBOR (6.46% as of December 17, 1999)
plus 3% or (ii) at the Alternate Base Rate (which is the greater of (a)
Chase's Prime Rate (8.5% as of December 17, 1999), (b) Chase's Base CD
Rate (6.44% as of December 17, 1999) plus 1% or (c) the Federal Funds
Effective Rate (5.54% as of December 17, 1999) plus 1/2%) plus 2%.
The Company pays an annual commitment fee of .5% of the unused portion
of the credit line. As of December 16, 1999, the Company had drawn
down $64,094,000 under the credit facility out of a total net borrowing
base availability of $68,000,000. Also on that date, the Company held
over $23,000,000 of unrestricted cash and over
<PAGE>
$4,000,000 of restricted cash.
The credit agreement contains restrictive covenants to which the
Company must adhere. These covenants include limitations on additional
indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, capital expenditures, affiliate transactions, the
use of proceeds, and prohibit payment of cash dividends and prepayment
of subordinated debt. In addition, the credit agreement requires the
Company to maintain a minimum liquidity level, limits overhead expense
and requires the Company to meet certain ratios. The credit agreement
also contains a provision permitting the bank to declare an event of
default if either of Messrs. Locke or Kushner fails to be the Chief
Executive Officer of the Company or if any person or group acquires
ownership or control of capital stock of the Company having voting
power greater than the voting power at the time controlled by Messrs.
Kushner and Locke combined (other than any institutional investor able
to report its holdings on Schedule 13G which holds no more than 15% of
such voting power. For fiscal 1999 the group has waived the Company's
noncompliance with the annual overhead covenant.
In December 1998 the banks increased the maximum amount of the
Company's collateralized line of credit from $60,000,000 to
$75,000,000. Existing participants in the syndicate approved the
increase and are committed to lend up to $68,000,000. Additional
availability is subject to adding new banks to the syndicate. As of
December 16, 1999, the principal amount outstanding under this credit
line was $64,094,000 and $3,906,000 remained available for borrowing.
The credit facility expires in June 2000. The Company is currently in
discussions with Chase regarding extending the secured revolving
facility beyond its current maturity date. While the discussions are
presently in an early stage and no agreement has been reached, Chase
has expressed a willingness to extend the maturity date beyond fiscal
2000. See Summary below.
Proceeds from Securities Offerings
In September 1994, the Company filed a registration statement for
21,388,064 shares of common stock (now 3,564,678 shares giving effect
to the fiscal 1997 1-for-6 reverse stock split) comprising the shares
of common stock issuable upon conversion of the 8% Convertible
Subordinated Debentures and the 9% Convertible Subordinated Debentures
and certain warrants issued to underwriters.
In July 1996, the Company closed a secondary public offering of an
aggregate of 4,750,000 units (a "Unit"), each Unit consisting of two
shares of Common Stock (now equivalent to 1,583,334 shares in the
aggregate giving effect to the 1-for-6 reverse stock split) and one
five year Class C Redeemable Common Stock Purchase Warrant to purchase
Common Stock at an adjusted exercise price of $6.8625 per share. The
Company received net proceeds in the amount of $9,203,000. In
connection with such offering, the Company issued warrants to purchase
up to an aggregate of 475,000 Units (prior to the reverse split) at an
adjusted rate of $18.00 per Unit to the underwriter thereof and a
consultant.
In December 1998 the Company obtained net proceeds of $5,673,000
($6,000,000 of gross proceeds) through a private placement of 1,200,000
newly-issued shares of common stock. In February 1999 the Company
filed a registration statement for such shares.
On April 26, 1999 the Company issued 468,883 shares of restricted
common stock to The Harvey Entertainment Company ("Harvey") in exchange
for 55,000 shares of Series A Preferred Stock of Harvey and 388,215
warrants exerciseable into common stock of Harvey, all pursuant to a
stock purchase agreement involving a new Harvey investor group which
includes the Company. The Harvey Series A Preferred Stock are
convertible into 814,814 shares of Harvey common stock commencing
October 26, 1999 and require payment of quarterly dividends in cash or
in additional shares of Harvey Series A Preferred Stock at a 7% annual
rate. The Company holds certain demand and piggyback registration
rights relating to its Harvey securities. On a fully-diluted basis,
assuming all securities exerciseable or convertible into Harvey common
stock are so exercised or converted, the Company would own 12% of the
voting shares of Harvey. In June 1999 the Company filed a registration
statement for the shares of its restricted common stock issued to
Harvey.
Effective May 14, 1999 the Company called for redemption of all of its
Class C Redeemable Common Stock Purchase Warrants (the "Class C
Warrants") and its outstanding 10% Convertible Subordinated Debentures,
Series A due 2000.
<PAGE>
In advance of the redemption, a total of 794,215 Class C Warrants were
exercised for 794,215 shares of Common Stock and the Company received
proceeds of $5,419,000. In advance of the redemption, the Company
issued 6,435 new shares of common stock for the conversion of $49,000
aggregate principal amount of the Series A Debentures. The Company
redeemed $28,000 aggregate principal amount of the Series A Debentures.
On June 25, 1999, the Company's subsidiary US SEARCH.com consummated an
initial public offering of newly-issued common stock. The subsidiary
sold 4,500,000 newly-issued shares and obtained $36,109,000 of net
proceeds. Also on June 25, 1999 the Company sold 1,500,000 shares out
of its holdings of US SEARCH.com common stock and obtained $12,555,000
of net proceeds. The Company retains a 55.2% interest in the
subsidiary and continues to consolidate the subsidiary in the
accompanying financial statements. The Company recognized a
$13,148,000 pre-tax gain on the sale of the 1,500,000 shares and a
$21,018,000 gain on the increased value of its proportion of the net
equity of the subsidiary.
Production Loans
The Company's production loans, totaling $16,272,000 as of September
30, 1999, consisted of production loans by Comerica Bank - California
("Comerica") and Far East National Bank ("Far East") to consolidated
production entities, and loans to the Company's 55.2%-owned subsidiary,
US SEARCH.com. The Company provided limited corporate guarantees for
portions of the production loans which are callable in the event that
the respective borrower does not repay the loans by the respective
maturity date. In general these loans are non-recourse to the Company
except to the extent of the guaranties. However, the Company
occasionally advances funds to the lenders in advance of receipts from
customers. Deposits paid by the distributing licensees prior to the
delivery of the financed pictures are held as restricted cash
collateral by the Lenders.
The table below shows production loans as of September 30, 1999:
<TABLE>
<CAPTION>
Kushner-
Original Locke
Film or Loan Amount Weighted Corporate Present
Company Lender Amount Outstanding Interest Guaranty Maturity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Susan's Plan Comerica $4,625,000 $2,529,000 Prime+1 $600,000 6/30/2000
Ringmaster Comerica 4,200,000 1,099,000 Prime+1% 800,000 12/31/1999
Mambo Cafe Far East 1,400,000 743,000 Prime% -- 4/30/2000
Picking Up +1.5%
The Pieces Comerica 12,000,000 10,544,000 Prime+1% 700,000 3/31/2000
The Last
Producer Far East 1,626,000 1,285,000 Prime+1% -- 6/30/2000
Conquistador Comerica --(1) 72,000 --
----------- ----------- ----------
$23,851,000 $16,272,000 $2,100,000
=========== =========== ==========
</TABLE
___________________
(1) assumed from former employee.
In February 1997, a $6,300,000 production loan was obtained by a
consolidated subsidiary from Banque Paribas (Los Angeles Agency) to
cover a portion of the production budget of Basil. In June 1999 the
$229,000 remaining balance of the loan was repaid.
In November 1997, an $8,200,000 production loan was obtained from
Comerica by an unconsolidated company 25%-owned by the Company to cover
a portion of the production budget of Beowulf. The loan bears interest
at Prime (8.5 % as of December 17, 1999) plus 1% or at LIBOR (6.46% as
of December 17, 1999) plus 2%. The Company has provided a corporate
guaranty in the reduced amount of $500,000 in connection with this
loan. The loan is collateralized by the rights, title and assets
related to the film. As extended, the loan matures on December 31,
1999.
In April 1998, a $4,625,000 production loan was obtained by a
consolidated subsidiary from Comerica to cover the production budget of
Susan's Plan. The loan bears interest at Prime (8.5 % as of December
17, 1999) plus 1% or at
<PAGE>
LIBOR (6.46% as of December 17, 1999) plus 2%. The loan is
collateralized by the rights, title and assets related to the film.
The Company provided a corporate guaranty in the amount of $600,000 in
connection with this loan. As extended, the loan matures on June 30,
2000.
In April 1998, a $1,850,000 production loan was obtained by a
consolidated subsidiary from Comerica to cover the production budget of
Black and White. In July 1999 the $379,000 remaining balance of the
loan was repaid.
In August 1998, a $2,900,000 production loan was obtained by a
consolidated subsidiary from Comerica to cover the production budget of
Ringmaster. In November 1998, the loan amount was increased to
$4,200,000. The loan bears interest at Prime (8.5 % as of December 17,
1999) plus 1% or at LIBOR (6.46% as of December 17, 1999) plus 2%. The
loan is collateralized by the rights, title and assets related to the
film. The Company provided a corporate guaranty in the amount of
$800,000 in connection with this loan. As extended, the loan matures
on December 31, 1999.
In October 1998, a $1,400,000 production loan was obtained by a
consolidated subsidiary from Far East to cover the production budget of
Mambo Cafe. The loan bears interest at Prime (8.5 % as of December 17,
1999) plus 1.5%. The loan is collateralized by the rights, title and
assets related to the film. As extended, the loan matures on April 30,
2000.
In October 1998, a $2,500,000 production loan was obtained by an
unconsolidated company from Far East to cover the production budget of
Freeway II: Confessions of a Trickbaby. The loan bears interest at
Prime (8.5 % as of December 17, 1999) plus 1.5%. The loan is
collateralized by the rights, title and assets related to the film.
The Company provided a corporate guaranty in the amount of $400,000 in
connection with this loan. As extended, the loan matures on April 30,
2000.
In April 1999 a $12,000,000 loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Picking Up
The Pieces. The loan bears interest at Prime (8.5 % at December 17,
1999) plus 1% or at LIBOR (6.46% at December 17, 1999) plus 2%. The
loan is collateralized by the rights, title and assets related to the
film. The Company provided a corporate guaranty in the amount of
$700,000 in connection with this loan. The loan matures on March 31,
2000.
In June 1999, a $1,626,000 production loan was obtained by a
consolidated subsidiary from Far East to cover a portion of the
production budget of The Last Producer. The loan bears interest at
Prime (8.5 % as of December 17, 1999) plus 1%. The loan is
collateralized by the rights, title and assets related to the film.
The loan matures on June 30, 2000.
In February 1998, US SEARCH.com obtained a collateralized line of
credit from Comerica. Advances under the line bore interest at Prime
plus 2.50% payable monthly. In August 1998 the bank and the Company
agreed that the loan would be capped at the $345,000 amount outstanding
as of that date. In December 1998 Comerica extended the loan's
maturity date from November 1998 to March 1999. In March 1999, US
SEARCH.com repaid the loan.
In May 1998, a Canadian dollar 5,100,000 production loan was obtained
from a Canadian financial institution, by a formerly consolidated
subsidiary to cover a portion of the production budgets of six direct-
to-video feature films. The loan bears interest at the Canadian Prime
Rate plus 2%. The loan is collateralized by the rights, title and
assets related to the films. The Company agreed to pay $550,000 to the
former subsidiary borrower upon delivery of each of the films for the
acquisition of distribution rights. The Company deconsolidated the
subsidiary in March 1999. The Company made all $550,000 payments to
the former subsidiary borrower.
Capital Expenditure Commitments
Management expects to finance future production, broadcast and
distribution arrangements through a combination of production loans and
credit facility borrowings. No assurance can be given that such
financing will be available when and if needed. Management believes
the Company will comply with the restrictive covenants of the Chase
agreement and accordingly the credit facility will be available through
June 2000, the current maturity date. The Company is currently in
negotiations to extend the secured revolving facility beyond June 2000.
Chase has expressed a willingness to extend the facility, however no
agreement has been executed.
<PAGE>
US SEARCH.com has several cancelable and noncancelable agreements with
various data suppliers,Internet companies and advertisers. At September
30, 1999, the minimum noncancelable payments required under these
agreements are approximately $15,940,000, $8,600,000, $5,950,000,
$4,200,000, $4,200,000 and $1,050,000 for 2000, 2001, 2002, 2003, 2004
and thereafter, respectively. The Company expects US SEARCH.com to
increase its Internet and television advertising of US SEARCH.com's
services. As a result, US SEARCH.com's net losses may continue to
increase. Such lossess would adversely impact the Company's consolidated
results of operations, however the Company is not obligated to fund any
US SEARCH.com operating cash flow deficiencies.
Summary
The Company from time to time evaluates strategic alternatives for
enhancing liquidity in its core and non-core businesses. To pursue
strategic alternatives, the Company has engaged Prudential Securities.
In addition the Company will continue its advisory agreement with Allen
& Company Incorporated. Strategic alternatives include but are not
limited to, the pursuit of opportunities to enhance the exploitation of
the Company's library properties, its distribution system, and its
satellite channel. This approach may include consolidations with,
acquisition of or strategic partnering with companies in our core
businesses or in businesses complementary to our core businesses. In
addition to expanding production and its distribution business, whether
internally or by acquisition, the Company also considers acquisition
possibilities from time to time, including film libraries and companies
which may or may not be ancillary to the Company's existing business,
subject to the availability of financing as necessary. There can be no
assurances that any of these transactions will occur. Many of these
alternatives might require a change in the capital structure or equity
or debt financing. There is no assurance that financing sources will
be available or, if available, will be available on commercially
acceptable terms.
Management believes that existing resources and cash generated from
operating activities, together with amounts anticipated to be available
under the syndicated revolving credit agreement with Chase will be
sufficient to meet the Company's working capital requirements for at
least the next twelve months. The Company is currently in negotiations
to extend the secured revolving facility beyond its current maturity
date, however no agreement has been executed. Chase has expressed a
willingness to extend the facility, however there can be no assurance
that an extension of the maturity date will be obtained or, if
obtained, will continue the credit facility on its present terms. If
not extended, all amounts outstanding under the credit facility at June
30, 2000 will become due and payable on that date. The Company would
then be required to obtain additional capital from other sources to
satisfy such obligations. The inability to obtain such resources on
commercially acceptable terms would have a material adverse effect on
the Company's cash flow, the scope of strategic alternatives available
to the Company and its operations. The Company may seek other sources
of financing to meet its working capital requirements, including a
separate equity financing for US SEARCH.com or other possible sources
of financing. The Company from time to time seeks additional financing
through the issuance of new debt or equity securities, additional bank
financings, or other means available to the Company to increase its
working capital. The Company may not obtain additional financing on
terms satisfactory to the Company or at all.
International operations are a significant portion of total operations.
Therefore the Company is exposed to risks of currency translation
losses, cash collection and repatriation risks and risks of adverse
political, regulatory and economic changes.
The Company's business and operations have not been materially affected
by inflation.
Management believes that the Company's film and television sales
volumes are not subject to significant fluctuations based upon
seasonality, however search services have generally declined during
holiday periods.
Year 2000 ("Y2K") Issues
The "Year 2000 Issue" is typically the result of certain firmware
limitations and of limitations of certain software written using two
digits rather than four to define the applicable year. If software and
firmware with date-sensitive functions are
<PAGE>
not Year 2000 compliant, they may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations,
including, among other things, interruptions in customer service
operations, a temporary inability to process transactions, conduct
searches, or engage in similar normal business activities.
Corporate operations and film and television segment. The Company has
upgraded or replaced virtually all firmware in part to mitigate Year
2000 exposure. The Company utilizes off-the-shelf and custom software
developed internally and by third parties. The Company believes that
its off-the-shelf software is Year 2000 compliant. However, there is
no assurance that the Company will not be required to modify or replace
significant portions of its software so that its systems will function
properly with respect to dates in the year 2000 and thereafter.
The Company has completed a Year 2000 evaluation including Information
Technology ("IT") systems, non-IT systems, and critical third-party
entities with which the Company transacts business. If required
modifications to existing software and firmware or conversions to new
software or firmware are not made, or are not completed timely, or if
there is a malfunction in software or firmware used on computer systems
utilized by those upon whom the Company depends for provision of its
services, there is no assurance that potential systems interruptions or
the cost necessary to update such software or firmware or any outages
or delays in services will not have a material adverse effect on the
Company's business, financial condition, results of operations and
prospects. Further, the failure of the Company to successfully resolve
such issues could result in a shut-down of some or a substantial
portion of the corporate or film and television operations, which could
have a material adverse effect on the business, financial condition,
results of operations and prospects of the Company.
US SEARCH.com. The Year 2000 Issue could result in a system failure or
miscalculations causing significant disruption of operations,
including, among other things, interruptions in Internet traffic,
accessibility of the Web site, delivery of service, transaction
processing or searching and other features of US SEARCH.com services.
It is possible that this disruption will continue for an extended
period of time. US SEARCH.com depends on information contained
primarily in electronic format in databases and computer systems
maintained by third parties, including governmental agencies. The
disruption of third-party systems or its systems interacting with these
third-party systems could prevent US SEARCH.com from receiving orders
or delivering search results in a timely manner. In addition, US
SEARCH.com relies on the integration of many systems in aggregating
search data from multiple sources. The failure of any of those systems
as a result of Year 2000 compliance issues could prevent it from
delivering products and services. Failure of its systems or third-
party systems providing information used in our services could
materially adversely affect US SEARCH.com's business and results of
operations. Management has received information confirming the Year
2000 compliance from present data suppliers. Management has also
confirmed Year 2000 compliance with key third party vendors.
US SEARCH.com has conducted an evaluation of internal systems. The
objective was to ensure uninterrupted transition into the Year 2000.
The scope of the Year 2000 objective included: (1) information
technology ("IT") such as software and hardware, (2) non-IT systems
such as components contained in various safety systems, facilities and
utilities, and (3) readiness of key third parties, including suppliers
and customers. US SEARCH.com has obtained written confirmation of the
Year 2000 status of its third party software. US SEARCH.com has
utilized internal resources to test internally developed software for
Year 2000 compliance. USEARCH.com has modified or replaced certain
portions of its software so that its systems will function properly
with respect to dates in the year 2000 and thereafter. If there is a
malfunction in its systems, potential systems interruptions or delays
in services may have a material adverse effect on US SEARCH.com's
business, financial condition and results of operations. Further, if
management fails to successfully resolve these issues, some or all of
US SEARCH.com's operations may shut-down, which would have a material
adverse effect on its business, financial condition and results of
operations.
US SEARCH.com has a process in place to assess the Year 2000 readiness
of its business critical vendors and customers, and has worked with
these vendors and customers on Year 2000 compliance issues.
Disruptions with respect to computer systems of vendors or customers,
whose systems are outside US SEARCH.com's control, could impair its
ability to provide support to customers, and could have a material
adverse effect on its financial condition and results of operations.
<PAGE>
Overall. Management has developed contingency plans to be implemented
as part of its efforts to identify and correct Year 2000 problems with
internal and Web-based systems. Within the plans, management addresses
various problems, including disruptions to Web-servers, significant
interruption of data flow between the Company and third party data
providers, and failures associated with internal systems. The
contingency plans emphasize the identification and accessibility of
additional data sources for US SEARCH.com services. There is no
assurance that the contingency plans will adequately address all Year
2000 issues.
US SEARCH.com has incorporated the utilization of (1) additional data
sources, (2) manual procedures for order processing and delivery of
search results (3) standby equipment and accelerated availability of
replacement parts, and (4) increased staffing levels for resolution of
information technology issues and to manually process orders. Failure
to implement any of these plans, if and when necessary, may have a
material adverse effect on US SEARCH.com's business and results of
operations.
Finally, the Company is also vulnerable to external forces that might
generally affect industry and commerce, such as utility or
transportation company or Internet Year 2000 compliance failures and
related service interruptions. Any significant interruption of general
access to the Internet, or the customary function and operations of,
the Internet could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects.
Some commentators have predicted significant litigation regarding Year
2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may
be affected by it.
The Company currently believes that this issue will not pose
significant operational problems for its corporate or film and
television operations, however delays in the modification or conversion
of its or US SEARCH.com's systems, or those of vendors and suppliers of
services to the Company and US SEARCH.com, or the failure to fully
identify all Year 2000 dependencies in the systems could have a
material adverse effect on the Company's business, financial condition,
results of operations and prospects.
The Company cannot quantify the impact of the Year 2000 Issue; however,
failure of critical internal IT systems, non-IT systems, third-party
vendors and financial institutions may limit or prevent the Company
from performing services for its customers, and could have a material
adverse effect on the Company's business, financial condition, results
of operations and prospects. We estimate that the total cost of
implementing and maintaining our Year 2000 compliance program will not
exceed $200,000 and most of these costs have been incurred to date.
This estimate includes implementation of redundant hardware, software
and communications systems.
8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Item 8 are
set forth in the pages indicated in Item 14.
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On October 20, 1998, the Company changed its independent public
accountants. This change (and the response of the Company's former
independent public accountants) is described in the Company's Current
Report on Form 8-K filed on October 27, 1998, which is incorporated by
reference herein. This Annual Report contains an independent auditor's
report issued by the Company's former independent public accountants.
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Executive Officers and Directors
Directors of the Company are elected annually by the shareholders to
serve for a term of one year or until their successors are duly elected
and qualified. Officers are elected by the Board of Directors and
serve at the Board's pleasure. Set forth below is certain information
concerning each person who was an executive officer or director of the
Company as of September 30, 1999.
</TABLE>
<TABLE>
<CAPTION>
Director
Name Age Since Position
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Peter Locke 56 1983 Co-Chairman and Co-Chief Executive
Officer; Director
Donald Kushner 54 1983 Co-Chairman, Co-Chief Executive
Officer and Secretary; Director
Irwin Friedman* 65 1998 Director
Stuart Hersch* 48 1989 Director
John Lannan* 53 1998 Director
Bruce St. J. Lilliston 47 -- Chief Operating Officer and
President
Robert Swan 52 -- Senior Vice President and Chief
Financial Officer
</TABLE>
______________________
* Member of Audit Committee and Compensation Committee
Background of Executive Officers and Directors
The business experience, principal occupations and employment of each
of the directors and executive officers of the Company, for at least
the past five years, are as follows:
Peter Locke co-founded the Company with Donald Kushner in 1983 and
currently serves as Co-Chairman and Co-Chief Executive Officer of the
Company. Mr. Locke has served as executive producer on substantially
all of the Company's productions since its inception. Prior to 1983,
Mr. Locke produced several prime-time television programs, including
two years of the Stockard Channing Show and the NBC television mini-
series The Star Maker, starring Rock Hudson. Mr. Locke also produced
two made-for-television movies telecast on CBS and the films The Hills
Have Eyes Parts I and II. Mr. Locke is Co-Chairman of the board of
directors of US SEARCH.com.
Donald Kushner co-founded the Company with Peter Locke in 1983 and
currently serves as Co-Chairman, Co-Chief Executive Officer and
Secretary. Mr. Kushner has served as executive producer on
substantially all of the Company's productions since its inception. Mr.
Kushner was the producer of Tron, a 1982 Walt Disney theatrical film
starring Jeff Bridges, which was nominated for two Academy Awards. Mr.
Kushner is Co-Chairman of the board of directors of US SEARCH.com.
Irwin Friedman has served as a director of the Company since 1998. Mr.
Friedman is President of I. Friedman Equities, Inc., a corporate
financial services firm, which he founded more than twenty years ago.
Since 1991 Mr. Friedman has
<PAGE>
rendered financial consulting services to the Company through I.
Friedman Equities, Inc. Mr. Friedman was responsible for introducing
the Company to various investment banking firms, and has advised and
assisted the Company with various corporate financing and other
transactions. Mr. Friedman is a director of Recoton Corporation, a
consumer electronics company.
Stuart Hersch has served as a director of the Company since 1989.
Since 1996, Mr. Hersch has been a consultant to several entertainment
companies. In 1996, Mr. Hersch became a consultant to the Company. Mr.
Hersch assists the Company in analyzing potential strategic
acquisitions and provides the Company consulting services in connection
with the Company's infomercial operations. From 1990 to 1996, Mr.
Hersch was President of the WarnerVision Entertainment division of
Atlantic Records, a subsidiary of Time-Warner, Inc. From 1988 to 1989,
Mr. Hersch was Chairman of Hersch Diener & Company, an independent
consulting firm. From 1983 to 1987, Mr. Hersch was the Chief Operating
and Chief Financial Officer of King World Productions, Inc.
John Lannan has served as a director of the Company since 1998. Mr.
Lannan is the President of Brentwood Partners, Inc., a mortgage banking
company. From 1995 to 1998 Mr. Lannan was Vice President of Westco
Real Estate Finance Corp., a mortgage banking company. Previously he
was Vice-Chairman of Hollingsworth & Lord, a mortgage banking company.
Mr. Lannan is a director of Centennial Bank and of Orange County
Bancorp, treasurer of the Lannan Foundation, a not-for-profit
organization, and is a member of the California Bar.
Bruce St.J Lilliston became President and Chief Operating Officer of
the Company in October 1996. Prior to joining the Company, Mr.
Lilliston practiced entertainment law for 19 years. He represented the
Company in various transactions for the two years preceding his
appointment as Company President and Chief Operating Officer. Mr.
Lilliston served as an arbitrator for the American Film Marketing
Association, and also served a special master for the Los Angeles
Superior Court. He graduated from the University of Chicago Law School
in 1977, where he was an associate editor of the University of Chicago
Law Review. He received his bachelor of arts degree with honors from
Brown University in 1974. Mr. Lilliston was a partner in the law firm
of Paul, Hastings, Janofsky & Walker from 1989 to 1991, where he was
managing partner of that firm's entertainment finance and transactions
practice.
Robert Swan joined the Company as Controller in October 1996. In May
1997 Mr. Swan was appointed Chief Financial Officer and in May 1998
became Senior Vice President and Chief Financial Officer. Prior to
assuming the Chief Financial Officer role for the Company, Mr. Swan had
been Chief Financial Officer of AVI Entertainment Group, Inc., a music
publishing and distribution company since 1994. Mr. Swan is a
Certified Public Accountant and holds an MBA in finance and accounting
from the University of California at Los Angeles.
Directors who are also executive officers of the Company do not receive
any additional compensation for serving as members of the Board of
Directors or any committee thereof. Peter Locke and Donald Kushner
receive no compensation for serving as a member of the Board of
Directors. Irwin Friedman and Stuart Hersch receive $25,000 annually
each, and John Lannan receives $15,000 annually, for serving on the
Board of Directors and any committees thereof. Each of Messrs. Friedman
and Lannan were granted options to purchase 16,667 shares at an exercise
price of $2.84 in June 1998, and Mr. Hersch was granted options to
purchase 16,667 shares at an exercise price of $1.875 in August 1997. In
1990 Mr. Hersch was granted options to acquire 71,185 adjusted shares of
common stock at an adjusted price of $9.33 per share. Each of Messrs.
Friedman, Hersch and Lannan were granted options to purchase 13,333 shares
at an exercise price of $7.19 in February 1999 and options to purchase
13,333 shares each at an exercise price of $4.8125 in September 1999. In
September 1999 Mr. Hersch was granted options to purchase 40,000 shares at
an exercise price of $4.8125 per share.
During the 1999 fiscal year, there were six meetings of the Board of
Directors, five meetings of the Compensation Committee and two meetings
of the Audit Committee of the Board of Directors. Each director
attended all of the meetings of the Board of Directors, the
Compensation Committee and the Audit Committee held during the period
for which he was a director or for which he had served as a committee
member.
<PAGE>
Other Significant Employees
The business experience, principal occupations and employment for at
least the past five years of certain other significant employees who
have made or are expected to make significant contributions to the
business of the Company are as follows:
Rob Aft, age 35, was appointed President of International Distribution
of the Company in December 1999. From November 1994 to November 1999,
Mr. Aft was Senior Vice President for Worldwide Distribution at
Behaviour Worldwide. From August 1991 to November 1994, Mr. Aft was
Vice President International Sales for Trimark Holdings. Mr. Aft is a
member of the board of directors of the American Film Marketing
Association.
Richard Marks, age 51, was appointed Executive Vice President and
General Counsel of the Company in April 1997. Prior to that, he served
as the Company's Senior Vice President in charge of Legal and Business
Affairs since joining the Company in October 1993. From 1991 to
October 1993, Mr. Marks served as Senior Vice President in charge of
Business and Legal Affairs for Media Home Entertainment, an independent
film producer and video distributor. From 1983 to 1991 Mr. Marks held
similar legal and business affairs positions with Walt Disney Pictures,
Paramount Pictures and Weintraub Entertainment Group.
Adam Moos, age 39, joined the Company in October 1999 as Executive Vice
President-Production. From 1994 to October 1999. Mr. Moos was Vice
President-Production at Film Finances, Inc., a production guarantor.
Phillip Mittleman, age 29, joined the Company in 1993 as Director of
Development, Feature Films. In March 1994 Mr. Mittleman was appointed
Vice President, Feature Films. In 1995 Mr. Mittleman was appointed
Executive Vice President, Feature Films. Prior to 1993 Mr. Mittleman
served as production coordinator, script coordinator and writer's
assistant on various Company projects.
Steven Rosen, age 39, joined the Company in June 1994 as Production
Controller. In June 1995 Mr. Rosen was appointed Director - Production
Finance. In June 1997 Mr. Rosen was appointed Vice President -
Production Finance. In January 1999 Mr. Rosen was appointed Executive
Vice President, Operations and Finance. Prior to June 1994 Mr. Rosen
served as Controller of The Finnigan Pinchuk Company.
C. Nicholas Keating, Jr., age 57, has served as President, Chief
Executive Officer and a director of US SEARCH.com since March 1999.
Mr. Keating has served as an independent business advisor since 1993 to
a number of companies principally in the networking, software,
semiconductor and imaging industries. From 1987 to 1993, Mr. Keating
was Vice President of Network Equipment Technologies, Inc., a wide-area
networking company. Mr. Keating currently serves on the Board of
Directors of MCMS, Inc., a leading advanced electronics manufacturer
serving original equipment manufacturers, E-Net Corporation, an
enterprise software supplier to the financial services industry, and
LIC Energy, a European simulation systems company serving the oil and
gas transmission market. Mr. Keating holds a B.A. and a M.A. from
American University and is a former Fulbright Scholar.
Nicholas Matzorkis, age 37, is the Chief Strategist of US SEARCH.com.
Mr. Matzorkis co-founded US SEARCH.com in 1994 and served as its
President and a director from inception to September 1998. From 1992
to 1994, Mr. Matzorkis was founder and President of U.S. Bell Long
Distance, an aggregator and reseller of telecommunications services.
In addition, from 1992 through 1997 Mr. Matzorkis consulted with
companies in the entertainment industry on Web site development, and
promoted a variety of music and entertainment ventures.
William G. Langley, age 50, has served as Chief Financial Officer of US
SEARCH.com since March 1999. From September 1992 to March 1999, Mr.
Langley served as Chief Financial Officer of FEI Company, a company
that designs, manufactures and markets particle beam products, and was
promoted in October 1994 to its Chief Financial Officer, Chief
Operating Officer, President and director. Mr. Langley was Vice
President of Acquisitions/Finance for Ticonderoga Partners from 1990 to
1992 as well as Vice President of Capital Preservation and
Restructuring for Shearson Lehman Hutton from 1988 to 1990. From 1984
to 1988, Mr. Langley served as the Vice President-Asset Finance at
Kidder, Peabody & Company. He is a member of the Oregon state bar and
a certified public accountant. Mr.
<PAGE>
Langley holds an LL.M. from New York University School of Law, a J.D.
from Northwestern School of Law of Lewis & Clark College and a B.A.
from Albertson College of Idaho.
Robert J. Richards, age 46, has served as Vice President, Operations of
US SEARCH.com since April 1999. From November 1996 to 1999, Mr.
Richards served as Vice President, Operations at E-Net Corporation,
overseeing certain aspects of research and development, technical
support, technical writing and MIS activities. From October 1995 to
September 1996, Mr. Richards served as Vice President, Operations at
GEMM Corporation and directed all operations activities including
sales, marketing, administration research and development. Mr.
Richards joined QuickResponse Services, Inc. in February 1988 serving
in various roles, and became its Vice President, Research and
Development in July 1994. From June 1983 to February 1988, Mr.
Richards served as Director, Systems Technology and then as Vice
President, Operation at the Pacific Stock Exchange. Mr. Richards holds
a B.A. in Business and Economics from Moravian College.
Robert Anderson, age 42, has served as Marketing Vice President of US
SEARCH.com since October 1999. From November 1997 to October 1999, Mr.
Anderson was an independent marketing consultant who served as Strategy
Director for USWeb/CKS, head of marketing for Apple Computer, and head
of sales and marketing for Seiko Epson Corporation. From 1995 to 1997
Mr. Anderson co-founded and operated Silver Hammer, an Emmy Award-
winning broadcast design firm. Mr. Anderson holds an MBA degree from
Columbia University and a B.S. in computer science from the University
of Southern California.
Karol Pollock, age 47, has served as Vice President and General Counsel
for US SEARCH.com since October 1999. From September 1996 to October
1999 Ms. Pollock was Regional Counsel with NASD Regulation, Inc. From
March 1993 to July 1996 Ms. Pollock was General Counsel and Assistant
Director of the New Mexico Securities Division. From September 1990 to
September 1992 Ms. Pollock was a senior staff attorney with the
Securities and Exchange Commission. Ms. Pollock holds a J.D. degree
from Loyola University School of Law in Los Angeles and a B.A. in
political science from the University of Illinois.
Meg Shea-Chiles, age 45, has served as Vice President, Business
Development of US SEARCH.com since May 1999. From 1998 to 1999, Ms.
Meg Shea-Chiles served as Executive of Global Alliances at IBM, where
she also served as Director of Reengineering and Information Technology
from 1996 to 1998, and Program Director of Business Development from
May 1995 to 1996. From December 1994 to May 1995, Ms. Shea-Chiles
served as Vice President, Product Design for NBS Imaging Systems, Inc.,
a systems integrator and producer of identification and verification
cards. From March 1989 to December 1994, Ms. Shea-Chiles served in
various roles at Network Equipment Technologies, Inc., a manufacturer
of enterprise network equipment, and became its Senior Director of
Strategic Partnership Programs in 1991. Ms. Shea-Chiles holds a B.S.,
magna cum laude, in Psychology and in Biology from Boston College and a
M.S. in Chemistry from Southern Methodist University.
Alan Mazursky, age 41, has served as Vice President, Finance of US
SEARCH.com since March 1999. From January 1998 to March 1999 Mr.
Mazursky was a consultant to the Company and acted as Chief Financial
Officer of US SEARCH.com from July 1998 through March 1999. From 1996
to 1998 Mr. Mazursky was an independent financial consultant. From
1988 to 1996 Mr. Mazursky was Chief Financial Officer of Hard Rock Cafe
America, the owner, operator and franchisor of Hard Rock Cafe
restaurants in the western United States and certain international
territories.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers and
directors, and persons who beneficially own more than 10% of any class
of the Company's equity securities to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange
Commission ("SEC"). Executive officers, directors and beneficial owners
of more than 10% of any class of the Company's equity securities are
required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company during or with respect to fiscal 1999,
<PAGE>
and certain written representations from executive officers and
directors, the Company believes that each such person has complied with
all Section 16(a) filing requirements applicable to such executive
officers, directors and greater than 10% beneficial owners, except that
Bruce Lilliston inadvertently failed to file one report on a timely
basis, covering one transaction reflecting a grant of options to
acquire common stock
Item 11. Executive Compensation
Cash Compensation
The following table sets forth the cash compensation paid or accrued by
the Company during the fiscal year ended September 30, 1999 to the
Chief Executive Officer and each executive officer of the Company whose
salary and bonus exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Awards
Compensation(1) ----------------------
---------------- Securities All Other
Name and Restricted Underlying Compensation
Principal Fiscal Salary Bonus Stock Options/ (1)(4)
Position Year ($) ($) Awards($) SARs(#) ($)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter Locke(2)(3) 1999 457,596 679,904 243,750(5) 100,000/0 4,216
Co-Chairman, Co- 1998 425,000 -- -- -- 30,856
Chief Executive 1997 425,000 -- -- 166,666/0 36,293
Officer
Donald Kushner(3) 1999 457,596 679,904 243,750(5) 100,000/0 4,216
Co-Chairman, Co- 1998 425,000 -- -- -- 27,989
Chief Executive 1997 425,000 -- -- 166,666/0 33,878
Officer and
Secretary
Bruce Lilliston 1999 400,000 118,811 -- 12,500/0 --
President and 1998 400,000 74,132 -- 8,333/0 --
Chief Operating 1997 400,000 -- -- 20,834/0 --
Officer
Robert Swan 1999 186,153 20,000 -- -- --
Senior Vice 1998 172,558 -- -- -- --
President and 1997 124,154 -- -- 25,000/0 --
Chief Financial
Officer
</TABLE>
______________________
(1) In accordance with the rules of the Commission, the
compensation described in this table does not include medical, group
life insurance or other benefits received by the named executive
officers that are available generally to all of our salaried employees
and perquisites and other personal benefits received by the named
executive officers that do not exceed the lesser of $50,000 or 10% of
the officer's salary and bonus disclosed in this table. Does not
include perquisites including automobile allowances and $25,000 annual
non-accountable expense allowances in the case of Messrs. Locke,
Kushner and Lilliston.
(2) Does not include payments by the Company's subsidiary, US
SEARCH.com, prior to January 30, 1998, when the Company acquired such
subsidiary.
<PAGE>
(3) Does not include options to purchase shares of the common
stock of US SEARCH.com which were approved by the Company and Search,
but subsequently were terminated prior to full documentation pursuant
to a waiver of any rights to receive such options executed by Messrs.
Kushner and Locke.
(4) Consists of term life insurance premiums paid by the Company on
behalf of the Named Executive Officers in respect of a $3,500,000
policy and disability insurance premiums paid by the Company on behalf
of the Named Executive Officers.
(5) Consists of 50,000 shares for which the restrictions lapsed in
June 1999.
Employment Agreements
Messrs. Kushner and Locke. In March 1994, the Company amended
employment agreements with each of Messrs. Kushner and Locke to
extend the term of the agreement to September 1998 and reduce the
maximum annual performance bonus that each may receive to 4% of pre-tax
earnings up to a maximum of $270,000 in fiscal 1997 and $290,000 in
fiscal 1998. Under the revised agreements, Messrs. Kushner and Locke
each received a base salary of $425,000 in fiscal 1997 and fiscal
1998. In addition, the Company granted to each, in March 1994,
options to purchase 150,000 adjusted shares of common stock at an
adjusted exercise price per share of $5.04. The options are fully
vested.
In October 1997, the Company extended the term of Messrs. Kushner and
Locke's agreements to October 2002. Messrs. Kushner and Locke each
continued to receive annual base compensation of $425,000 in fiscal
1997 and fiscal 1998, and receive $25,000 annual increases beginning in
fiscal 1999 under the amended agreement up to a maximum of $525,000.
If Company achieves earnings before income taxes prior to the profit
bonuses in excess of $2,000,000, each of Messrs. Kushner and Locke are
entitled to profit bonuses at graduated rates ranging from 5% of such
annual earnings before income taxes up to $4,000,000, with increasing
percentages up to 7.5% of annual earnings before income taxes in excess
of $8,000,000. The total profit bonus is not to exceed two times
annual base compensation.
In August 1997, the Company granted to each of Messrs. Kushner and
Locke options to purchase 83,333 adjusted shares of Common Stock at an
exercise price per share of $1.875 . These options (time vesting
options) vest over a five year period, with 20% vesting respectively on
each of the five annual anniversary dates following the date of the
grant (subject to acceleration in the event of termination of
optionee's employment agreement by such optionee for "cause" (as
defined therein) or wrongfully by the Company or upon certain "Events"
(as defined under the agreement), including termination following a
"change-in-control" as defined in the agreement). The Company also
granted to each of Messrs. Kushner and Locke options to purchase an
additional 83,333 (post reverse split) shares of Common Stock at an
exercise price per share equal to $1.875, vesting at the rate of 20%
per year, but exercisable only upon (i) the achievement of at least 85%
of certain annual earnings before income tax targets to be set by the
board of directors or (ii) the Company's Common Stock reaching certain
public trading prices ranging from $3.00 to $6.00 per share. Such
performance options are also subject to accelerated vesting and
exercisability under the circumstances described above for the time-
vesting option tranche. As of September 30, 1999 50,000 time vesting
options and 83,333 performance options had vested for each of Messrs.
Kushner and Locke.
In March 1999 the Company further amended the employment contracts of
Messrs. Kushner and Locke to extend the term of the agreements to March
2004. Under the revised employment agreements, each of Messrs. Kushner
and Locke were granted a $25,000 increase in annual base compensation
for each year of employment, and will be entitled to an annual base
compensation of $550,000 in fiscal 2003 and $575,000 in fiscal 2004.
Messrs. Kushner and Locke were also granted 50,000 shares of restricted
Common Stock, and one-half of each of their remaining unvested stock
options were determined to be immediately vested. In June 1999 the
restrictions on the shares of common stock lapsed and unrestricted
shares were issued to each of them.
In September 1999 the Board of Directors granted to each of Messrs.
Kushner and Locke special bonuses of $500,000 and fully vested options
to acquire 100,000 shares of common stock at $4.6875 per share. The
awards were granted based upon
<PAGE>
the executives' overall performance.
The Company also provides Messrs. Kushner and Locke with certain fringe
benefits, including $3,500,000 of term life insurance with a split
dollar ownership structure and disability insurance for each person.
If the employment agreement is terminated by the employee for "cause"
or wrongfully by the Company, the Company is required to pay the
present value of all unpaid premiums on the split dollar policy for the
ten (10) year period ending February 2007. The Company also agreed to
assign any key-man life insurance policy to the employee after certain
terminations of the employment agreement. The agreements permit
Messrs. Kushner and Locke to collect outside compensation and to
provide limited services outside of their employment with the Company
and to receive compensation therefor, so long as such activities do not
materially interfere with the performance of their duties under the
agreements. Each of Messrs. Kushner and Locke also may require the
Company to change its name to remove his name within one year after the
expiration or termination of his employment agreement, except that the
Company may continue to use such name for a period of one year after
such notice, or for such longer period of time as is reasonably
necessary to cause the Company not to default under any indebtedness
for borrowed money or other material agreement. In the event Messrs.
Kushner's or Locke's employment agreement is terminated following a
change of control, as such term is defined therein, such executive
would be entitled to a lump sum payment equal to all compensation and
benefits provided for in the agreement for the remainder of the term,
discounted at the rate of 10% per annum.
Mr. Lilliston. In September 1996, the Company entered into an
employment agreement with Bruce St. J. Lilliston pursuant to which the
Company employed Mr. Lilliston as the President and Chief Operating
Officer of the Company effective October 1996 for a three year term.
As part of the agreement, Mr. Lilliston is paid a base salary of
$400,000 per year. In addition, the Company loaned him $100,000 in
September 1996 and $200,000 in October 1996. The loans were made to
assist Mr. Lilliston in the transition from his private law practice to
his duties as Chief Operating Officer of the Company. The loans accrue
simple interest at the rate of 8% per annum and will be repaid over a
five year period at certain specified dates ending in October 2001.
Mr. Lilliston receives bonuses equal to the amount of the payments,
including interest, due for such loan if Mr. Lilliston is still
employed by the Company (including the renewal of his employment
agreement if applicable) on certain dates (the "Employment Bonus").
Through September 30, 1999 Mr. Lilliston had received $150,000 of such
Employment Bonuses.
Beginning in October 1997, so long as Mr. Lilliston remains employed
by the Company (including the renewal of his employment agreement if
applicable), he is entitled to a bonus of $100,000 the first time the
adjusted "Average Closing Price" (the average closing price of the
common stock over a thirty calendar day period) is $6.00 or more
greater than the "First Day Price" (the average closing price of the
Common Stock, as adjusted, over the thirty calendar day period
immediately prior to October 1, 1996). Thereafter, if Mr. Lilliston is
still employed by the Company (including the renewal of his employment
agreement if applicable), he will be entitled to receive an additional
$100,000 bonus the first time the Average Closing Price exceeds the
First Day Price by $12.00 or more, as adjusted, and each whole six-
dollar amount through and including $60.00, as adjusted, (each such
bonus, a "Stock Bonus"). The aggregate of such bonuses is not to
exceed $1,000,000. The Stock Bonuses are reduced by an amount equal to
the Employment Bonus up to $150,000 plus interest payable thereon from
September 1996. Through September 30, 1999 Mr. Lilliston had received
a $100,000 Stock Bonus, subject to the aforementioned initial offset
which reduced said bonus to zero.
If the Company realizes pre-tax operating profits or earnings per share
for any fiscal year during Mr. Lilliston's employment greater than 100%
of the Company's largest pre-tax operating profit or earnings per share
amount for any of the preceding years of Mr. Lilliston's employment
under his employment agreement or in any of the five fiscal years
immediately preceding the commencement of such agreement, and if Mr.
Lilliston is still employed by the Company at the end of the applicable
fiscal year, then Mr. Lilliston is entitled to receive a bonus of
$50,000 for each such event. No bonus was earned or paid for fiscal
1998. For fiscal 1999 Mr. Lilliston earned both an operating profit
and earnings per share bonus, both of which were subject to the offset
mentioned above, resulting in a net bonus payable of $18,811.
As part of the agreement, the Company granted Mr. Lilliston options to
purchase up to 41,667 adjusted shares of Common Stock, with 20,834 of
such options having been granted and vested in November 1996. Options
to purchase an additional 8,333 shares of common stock and 12,500
shares of common stock were granted and vested in October 1997 and
October 1998, respectively, as Mr. Lilliston reached the performance
criteria established by the Board of Directors
<PAGE>
or a committee thereof. Discussions for an extension of Mr.
Lilliston's employment have commenced. If Mr. Lilliston's employment
is extended for a second term pursuant to the terms of the original
agreement (the "Second Term"), the Company is to grant Mr. Lilliston
options to purchase up to an additional 83,334 shares of Common Stock,
41,667, 16,667, and 25,000 of such options to be granted upon
commencement and one, and two years, respectively, after the
commencement of the Second Term with one-half of each such grant to
vest immediately upon grant and the remainder thereof to vest upon Mr.
Lilliston reaching certain performance criteria to be established by
the Board of Directors or a committee thereof. If Mr. Lilliston's
employment is extended beyond a Second Term, the Company is to grant
Mr. Lilliston options to purchase up to an additional 41,667 shares of
Common Stock , with such options granted in full upon such employment
extension with one-half of such grant to vest immediately upon grant
and the remainder thereof to vest upon Mr. Lilliston reaching certain
performance criteria to be established by the Board of Directors or a
committee thereof. In the event the performance goals are not met,
such options vest at a fixed date in the future, contingent solely on
future employment. The exercise price for such options will be equal
to the closing price of the Common Stock on the applicable date of
grant. Finally, as part of Mr. Lilliston's agreement, he is allowed to
maintain not more than two independent outside legal consultancy client
relationships, subject to approval by the Co-Chief Executive Officers,
with earnings from such consultancies limited to $150,000 per year.
Effective September 30, 1999 Mr. Lilliston's employment was extended
for three months under the existing terms of employment. In January
2000 Mr. Lilliston's employment was continued on an at-will basis under
the same terms, and he received a $100,000 loan bearing interest at 8%.
Mr. Swan. In May 1997 the Company entered into an employment agreement
with Robert Swan pursuant to which the Company employed Mr. Swan as the
Chief Financial Officer of the Company for a three year term. Mr. Swan
was paid a base annual salary of $160,000 for the first year, $175,000
for the second year and $200,000 for the current year. Mr. Swan is to
receive a bonus equal to 10% of his base annual salary if net earnings
for a fiscal year are greater than that of the immediately preceding
fiscal year. The Company granted Mr. Swan options to purchase up to
25,000 shares of Common Stock, all of which have vested. In fiscal
1999 Mr. Swan earned a $20,000 bonus.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information concerning stock options
that the Company granted to the named executive officers. The Company
has never issued stock appreciation rights.
<TABLE>
<CAPTION>
Potential
Individual Grants realizeable value
------------------------------------------- value at assumed
Percentage of annual rates
Number of total options of stock price
securities granted to Exercise appreciation for
underlying employees or base Expira- option term(5)
Options in fiscal price tion ---------------
Name granted(#)(1) year(2) ($/Sh)(3) Date(4) 5%($) 10%($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
Peter Locke(6) 100,000 19.91% $4.6875 9/21/09 $298,787 $787,939
Donald Kushner(6) 100,000 19.91% $4.687 9/21/09 $298,787 $787,939
Bruce Lilliston(6) 12,500 2.49% $2.96 10/1/08 $23,656 $62,384
Robert Swan -- --% -- -- -- --
</TABLE>
__________________
(1) Represents options the Company granted under its 1988 Stock
Incentive Plan.
<PAGE>
(2) Based on an aggregate 502,243 shares of Common Stock subject to
options granted to employees during the last fiscal year.
(3) The Company granted options at an exercise price equal to the
closing price of the Common Stock on the NNM on the last trading day
before the grant.
(4) The term of each option grant is generally ten years from the date
of grant. The options may terminate before their expiration dates if
the option holder's status as an employee is terminated or upon the
option holder's death or disability.
(5) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the Commission and do not
represent either historical appreciation or the Company's estimate or
projection of its future Common Stock prices.
(6) Options immediately vested upon grant.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
The following table sets forth information concerning options that the
named executive officers exercised during the last fiscal year and the
number of shares subject to both exerciseable and unexerciseable stock
options as of September 30, 1999. The table also reports values for
"in-the-money" options that represent the positive spread between the
exercise prices of outstanding options and the fair market value of the
Common Stock as of September 30, 1999. The Company has never issued
stock appreciation rights.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter Locke -0- N/A 383,333/33,333 $447,916/$104,166
Donald Kushner -0- N/A 383,333/33,333 $447,916/$104,166
Bruce Lilliston 41,667 $345,964 0/0 $0/$0
Robert Swan 15,000 $74,695 10,000/0 $31,250/$0
</TABLE>
________________
(1) Calculated by determining the difference between the exercise price
and the sale price of the Common Stock on the NNM on September 30,
1999.
1988 Stock Incentive Plan
The 1988 Stock Incentive Plan (the "Plan") authorizes the granting of
varying forms of stock incentive awards ("Awards") to qualified
officers, employees, directors, key employees and third parties
providing valuable services to the Company, e.g., independent
contractors, consultants and advisors to the Company. In April 1999,
the shareholders of the Company voted to increase the adjusted
authorized number of shares available under the Plan from 1,250,000 to
1,820,000. The Plan may be administered by a committee appointed by
the Board and consisting of two or more members, each of whom must be
Non-Employee Directors. A Non-Employee Director is defined as a
director who is not employed by the Company or its subsidiaries, does
not receive compensation from the Company or its subsidiaries other
than as a director, except for compensation in an amount less than
$60,000, and is generally disinterested. The Plan is currently
administered by the entire board of directors, who determine the number
of shares to be covered by an Award, the term and exercise price, if
any, of the Award and other terms and provisions of Awards.
<PAGE>
The Plan is designed to help the Company attract and retain qualified
persons for positions of substantial responsibility and to provide
certain key employees and consultants with an additional incentive to
contribute to the success of the Company. As of September 30, 1999,
options to purchase 1,200,461 shares of the Company's Common Stock were
outstanding under the Plan. Through that date options to purchase
538,031 shares had been exercised, options to purchase 411,281 shares
had expired or been canceled and options to purchase 81,508 shares
remained available for grant under the Plan.
Awards can be Stock Options ("Options"), Stock Appreciation Rights
("SARs"), Performance Share Awards ("PSAs") and Restricted Stock Awards
("RSAs"). The number and kind of shares available under the Plan are
subject to adjustment in certain events. Shares relating to Options or
SARs which are not exercised, shares relating to RSAs which do not vest
and shares relating to PSAs which are not issued will again be
available for issuance under the Plan.
An Option may be an incentive stock option ("ISO") within the meaning
of the internal Revenue Code or a nonqualified option. The exercise
price for Options is to be determined by the Committee, but in the case
of an ISO is not to be less than fair market value on the date the
Option is granted (110% of fair market value in the case of an ISO
granted to any person who owns more than 10% of the Common Stock). The
purchase price is payable in any combination of cash, shares of Common
Stock already owned by the participant for at least six months or, if
authorized by the Committee, a promissory note secured by the Common
Stock issuable upon exercise. In addition, the award agreement may
provide for "cashless" exercise and payment. Subject to early
termination or acceleration provisions, an Option is exercisable, in
whole or in part, from the date specified in the related award
agreement until the expiration date determined by the Committee (not
to exceed 10 years from the date of grant).
The options granted under the Plan become exercisable on such dates as
the Board determines in the terms of each individual option. Options
are subject to termination in the event of a disposition of all or
substantially all of the assets or capital stock of the Company by
means of a sale, merger, consolidation, reorganization, liquidation or
otherwise; unless the Committee arranges for a continuation of the Plan
or for the optionee to receive payment or new options covering shares
of the corporation purchasing or acquiring the assets or stock of the
Company, in substitution of the options granted under the Plan. The
Committee in any event may, on such terms and conditions as it deems
appropriate, accelerate the exercisability of options granted under the
Plan. An ISO to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company must expire no later than
five years from the date of grant. A nonqualified stock option must
expire no later than ten years from the date of the grant.
The options granted under the Plan are not transferable other than by
will or the laws of descent and distribution. Unexercised options
generally lapse 3 months after termination of employment other than by
reason of retirement, disability or death (except in the case of ISOs)
in which case it terminates one year thereafter.
An SAR is the right to receive payment based on the appreciation in the
fair market value of Common Stock from the date of grant to the date of
exercise. In its discretion, the Committee may grant an SAR
concurrently with the grant of an Option. An SAR is only exercisable at
such time, and to the extent, that the related Option is exercisable.
Upon exercise of an SAR, the holder receives for each share with
respect to which the SAR is exercised an amount equal to the difference
between the exercise price under the related Option and the fair market
value of a share of Common Stock on the date of exercise of the SAR.
The Committee in its discretion may pay the amount in cash, shares of
Common Stock, or a combination thereof.
An RSA is an award of a fixed number of shares of Common Stock subject
to restrictions. The Committee specifies the prices, if any, the
recipient must pay for such shares. Shares included in an RSA may not
be sold, assigned, transferred, pledged or otherwise disposed of or
encumbered until they have vested. The recipient is entitled to
dividend and voting rights pertaining to such RSA shares even though
they have not vested, so long as such shares have not been forfeited.
A PSA is an award of a fixed number of shares of Common Stock, the
issuance of which is contingent upon the attainment of such performance
objectives, and the payment of such consideration, if any, as is
specified by the Committee.
<PAGE>
The Plan also provides for certain tax-offset bonuses and tax
withholding using shares of Common Stock instead of cash.
When a participant is no longer employed by the Company for any reason,
shares subject to the participant's RSAs which have not become vested
by that date or shares subject to the participant's PSAs which have not
been issued are forfeited in accordance with the terms of the related
Award agreements. Options which have become exercisable by the date of
termination of employment or of service on the Committee must be
exercised within certain specified periods of time from the date of
termination, dependent upon on the reason for termination. Options
which have not yet become exercisable on the date the participant
terminates employment or service for a reason other than retirement,
death or total disability terminate on that date.
All employees, officers and directors of, and consultants to, the
Company are eligible to participate in the Plan. The Committee
determines which persons shall be granted options, the extent of such
grants and, consistent with the Plan, the terms and conditions thereof.
As of December 17, 1999, approximately 50 employees of the Company, and
three directors of the Company who are not also employees of the
Company, are eligible to receive option grants under the Plan.
The Plan provides for anti-dilution adjustments in the event of a
reorganization, merger, combination, recapitalization,
reclassification, stock dividend, stock split or reverse stock split;
however, no such adjustment need be made if it is determined that the
adjustment may result in the receipt of federally taxable income to
optionees or the holders of Common Stock or other classes of the
Company's securities. Upon the dissolution or liquidation of the
Company, or upon a reorganization, merger or consolidation of the
Company as a result of which the Company is not the surviving entity,
the Plan will terminate, and any outstanding awards will terminate and
be forfeited unless assumed by the successor corporation.
The Board of Directors may, at any time, terminate, amend or suspend
the Plan. In addition, the Committee may, with certain exceptions,
amend any provision of the Plan. The Plan currently provides that the
Board may amend the Plan at any time without obtaining shareholder
approval to the fullest extent permitted by applicable law or
regulation. In the event the Board determines that shareholder
approval is required by applicable law or regulation, then such
amendments would be effective once approved by the Board and the
holders of a majority of the shares of Common Stock.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee participated in deliberations and decisions
regarding executive compensation. However, the full Board of Directors
of the Company participated in deliberations and decisions regarding
grants of new options to certain directors and certain employees in
connection with new employment agreements and amendments and extensions
of employment agreements with the Company. Other than Messrs. Kushner
and Locke, no member of the Board of Directors was, during the fiscal
year or formerly, an officer or employee of the Company or any of its
subsidiaries, however Mr. Hersch is paid $4,916 per month ($7,500 per
month through March 1999) and Mr. Friedman is paid $24,000 per quarter
(commencing in April 1999) pursuant to consulting contracts. During
fiscal year 1999, Mr. Locke served as Co-Chairman of the Board, and Co-
Chief Executive Officer of the Company, and Mr. Kushner served as Co-
Chairman of the Board, Co-Chief Executive Officer, and Secretary of the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
<PAGE>
BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS
The following table sets forth certain information as of January 17,
2000 concerning the beneficial ownership of Common Stock, by (i) each
person who is known to the Company to be a beneficial owner of more
than 5% of the outstanding Common Stock; (ii) each of the current
Directors of the Company; (iii) each of the Named Executive Officers;
and (iv) all current Directors and Executive Officers of the Company as
a group. The address and telephone number for those directors and
executive officers not otherwise noted is 11601 Wilshire Boulevard,
21st Floor, Los Angeles, California 90025, (310) 481-2000.
<TABLE>
<CAPTION>
Common Stock Percent of
Beneficial Owner Beneficially Owned Class (8)
<S> <C> <C>
Peter Locke 931,012 (1) 6.54%
Donald Kushner 881,157 (1)(2) 6,19%
Irwin Friedman 132,222 (3) *
Stuart Hersch 154,518 (4) 1.10
John Lannan 51,110 (5) *
Bruce St. J. Lilliston 41,667 (4) *
Robert Swan 15,000 (6) *
Gruber & McBaine Capital Management, LLC 2,016,150 (7) 14.56%
Jon D. Gruber 2,286,550 (7) 16.52%
J. Patterson McBaine 2,326,300 (7) 16.80%
Thomas O. Lloyd-Butler 2,016,150 (7) 14.56%
All directors and executive officers as
a group (seven individuals) 2,206,686 14.74%
(1)(2)(3)(4)(5)(6)
</TABLE>
_____________
* Less than 1%
(1) Includes 350,000 shares subject to options which are currently
exercisable or exercisable within 60 days of the date hereof, and
excludes 66,666 options which are not currently exercisable or
exercisable within 60 days of the date hereof.
(2) Includes 33,333 shares owned by a corporation controlled by Mr.
Kushner.
(3) Includes 117,222 shares subject to options and warrants currently
exerciseable, and excludes 5,555 shares subject to options and warrants
which are not currently exercisable or exercisable within 60 days.
(4) Represents shares subject to options currently exercisable.
(5) Includes 37,778 shares subject to options currently exercisable,
and excludes 5,555 shares subject to options which are not currently
exercisable or exercisable within 60 days.
(6) Includes 10,000 shares subject to options currently exercisable.
(7) The information reported herein was provided orally by Gruber &
McBaine Capital Management, LLC as of January 17, 2000, superceding
information set forth in Form 13D dated December 10, 1999 filed jointly
by Gruber & McBaine Capital Management, LLC, Jon D. Gruber, J. Patterson
McBaine and Thomas O. Lloyd-Butler. All such persons reported shared
voting and dispositive powers for 2,016,150 shares. Mr. Gruber reported
sole voting and dispositive powers for 247,400 additional shares. Mr.
McBaine reported sole voting and dispositive powers for 310,150
additional shares. The address of Gruber & McBaine Capital Management,
LLC is 50 Osgood Place, Penthouse, San Francisco, CA 94133
<PAGE>
(8) As a percentage of the 13,844,408 shares outstanding on January
17, 2000 plus certain shares issuable upon conversion of convertible
securities or subject to options held by such person or persons.
Item 13. Certain Relationships and Related Transactions
Stuart Hersch, a Director of the Company, was previously President of
WarnerVision. During fiscal 1998 the Company paid to WarnerVision
$1,543,000, a previously accrued payment obligation, and settled
certain disputes with WarnerVision.
In September 1996, the Company entered into an employment agreement
with Bruce St. J. Lilliston pursuant to which the Company agreed to
hire Mr. Lilliston as the President and Chief Operating Officer of the
Company effective October 1996. As part of such agreement, Mr.
Lilliston is allowed to maintain not more than two independent outside
legal consultancy client relationships, subject to approval by the
Chief Executive Officers. Mr. Lilliston had provided various legal
services to certain of Kushner-Locke International's distributing
licensees as well as August Entertainment. See Item II, Executive
Compensation - Employment Agreement - Mr. Lilliston for a further
description of Mr. Lilliston's employment arrangement with the Company.
In April 1999 Mr. Lilliston exercised all options granted to him by the
Company and obtained 41,667 shares of common stock for $128,000.
Since April 1996, Stuart Hersch has consulted with the Company pursuant
to a month-to-month consulting agreement which provides for a monthly
fee of $4,916 (since April 1999; $7,500 per month previously) to be
paid to Mr. Hersch. Mr. Hersch assists the Company in analyzing
potential strategic acquisitions and provides the Company consulting
services in connection with the Company's infomercial operations.
From April 1999 to December 1999 the Company paid I. Friedman Equities,
Inc. $72,000 pursuant to a consulting agreement effective from April
1999 through June 2000. In July 1999 as a result of the Company's
redemption of its Class C Warrants, I. Friedman Equities was paid a fee
of $62,000 pursuant to a 1996 agreement. The Company understands that
I. Friedman Equities is controlled by Irwin Friedman, a Company
director.
From May 1997 to October 1997, Mr. Locke personally advanced US
SEARCH.com $397,000, bearing interest at 10% per annum, payable upon
demand. These advances were subsequently repaid in full. In addition,
US SEARCH.com paid approximately $40,000 in consulting fees and
interest to Mr. Locke for services rendered through December 1997.
In February 1999 the Board granted to each of Messrs. Kushner and Locke
50,000 restricted shares of common stock. In June 1999 the Board
removed such restrictions and the Company issued unrestricted shares to
each individual.
Messrs. Friedman, Hersch, and Lannan were each granted options to
purchase 13,333 shares of Company common stock at an exercise price of
$7.19 per share in February 1999. In September 1999 Messrs. Friedman,
Hersch, and Lannan were each granted options to purchase 13,333 shares
of Company common stock at exercise prices of $4.8125 per share. Also
in September 1999 Mr. Hersch was granted options for 40,000 shares of
common stock at an exercise price of $4.8125 per share. Also in
September 1999 the Board of Directors approved the granting to each of
Messrs. Kushner and Locke special bonuses of $500,000 and options for
100,000 shares of common stock at exercise prices of $4.6875 per share.
<PAGE>
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page
<S> <C> <C>
(a) (1) Financial Statements:
Report of Independent Accountants 53
Independent Auditors' Report 54
Consolidated Balance Sheets at September 30, 1999 and 1998 55
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997 56
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 1998, and 1997 57
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998, and 1997 58
Notes to Consolidated Financial Statements 59
(2) Financial Statement Schedule:
Schedule II for the years ended September 30, 1999, 1998, and
1997 78
All other schedules are inapplicable and, therefore,
have been omitted.
(3) Exhibits
Exhibits filed as part of this report are listed in the
Exhibit Index, which follows the Signatures 80
(b) Report on Form 8-K: None
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of The Kushner-Locke Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the
financial position of The Kushner-Locke Company (the "Company") and its
subsidiaries at September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the two years in the period
ended September 30, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth
therein for the years ended September 30, 1999 and 1998 when read in
conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Century City, California
December 21, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Kushner-Locke Company:
We have audited the accompanying consolidated statements of operations,
cash flows and stockholders' equity of The Kushner-Locke Company and
subsidiaries for the year ended September 30, 1997. In connection with
our audit of the consolidated financial statements, we have also
audited the accompanying financial statement schedule for the year
ended September 30, 1997. These consolidated financial statements and
the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of The Kushner-Locke Company and subsidiaries for the year
ended September 30, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial
statement schedule for the year ended September 30, 1997, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Los Angeles, California
December 26, 1997
<PAGE>
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 1998
------------ ------------
Assets
<S> <C> <C>
Assets:
Cash and cash equivalents $31,612,000 $1,255,000
Reserved cash 734,000 66,000
Restricted cash 4,088,000 1,988,000
Accounts receivable, net of allowance for
doubtful accounts of $3,248,000 in
1999 and $2,509,000 in 1998 30,030,000 40,418,000
Due from related party 2,611,000 2,719,000
Film and television program costs, net of
accumulated amortization 91,499,000 73,773,000
Investments in unconsolidated entities,
at equity 12,045,000 10,798,000
Other assets 12,496,000 6,088,000
------------ ------------
Total assets $185,115,000 $137,105,000
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities $11,104,000 $6,031,000
Due to related party 233,000 --
Notes payable 82,925,000 73,151,000
Deferred revenue 3,628,000 4,111,000
Contractual obligations 11,039,000 13,851,000
Production advances 1,592,000 2,969,000
Convertible subordinated debentures, net
of deferred issuance costs 2,269,000 11,526,000
------------ ------------
Total liabilities 112,790,000 111,639,000
Minority interest 11,580,000 --
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares: issued and outstanding
13,810,767 shares at September 30, 1999
and 9,217,029 shares at September 30, 1998 70,379,000 39,571,000
Accumulated deficit (9,634,000) (14,105,000)
------------ ------------
Net stockholders' equity 60,745,000 25,466,000
------------ ------------
Total liabilities and stockholders' equity $185,115,000 $137,105,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Film and television program
licensing $34,143,000 $68,261,000 $54,746,000
Search and individual reference
services 15,747,000 7,869,000 --
----------- ----------- -----------
Total operating revenues 49,890,000 76,130,000 54,746,000
----------- ----------- -----------
Costs related to operating revenues:
Film and television program
licensing (33,226,000) (58,038,000) (52,084,000)
Search and individual reference
services (6,440,000) (3,589,000) --
Total costs related to ----------- ----------- -----------
operating revenues (39,666,000) (61,627,000) (52,084,000)
----------- ----------- -----------
Gross profit 10,224,000 14,503,000 2,662,000
Selling, general and administrative
expenses (31,186,000) (12,028,000) (4,023,000)
Provision for doubtful accounts (2,959,000) (2,118,000) (1,310,000)
(Losses) earnings from ----------- ----------- -----------
operations (23,921,000) 357,000 (2,671,000)
Equity in net (losses) earnings of
unconsolidated entities (520,000) (330,000) 2,189,000
Dividend income 167,000 -- --
Interest income 520,000 79,000 163,000
Interest expense (7,782,000) (6,261,000) (4,027,000)
Gain on sale of interest in
subsidiary 13,148,000 -- --
Gain on issuance of stock by
subsidiary 21,018,000 -- --
----------- ----------- -----------
Earnings (loss) before
minority interest and
income taxes 2,630,000 (6,155,000) (4,346,000)
Minority interest in subsidiary
net losses 2,567,000 -- --
----------- ----------- -----------
Earnings (loss) before
income taxes 5,197,000 (6,155,000) (4,346,000)
Income tax expense (726,000) (181,000) (23,000)
----------- ----------- -----------
Net earnings (loss) $4,471,000 ($6,336,000) ($4,369,000)
=========== =========== ===========
Basic earnings (loss) per share $.38 ($.69) ($.49)
=========== =========== ===========
Diluted earnings (loss) per share $.36 ($.69) ($.49)
=========== =========== ===========
Weighted average common shares
outstanding 11,755,000 9,181,000 8,959,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Net
Accumulated Stockholders'
Shares Amount Deficit Equity
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 8,777,541 $37,650,000 ($3,400,000) $34,250,000
Issuance of common stock 227,500 598,000 -- 598,000
Conversion of subordinated
debentures 84,562 613,000 -- 613,000
Other 477 44,000 -- 44,000
Net loss -- -- (4,369,000) (4,369,000)
---------- ----------- ---------- -----------
Balance at September 30, 1997 9,090,080 38,905,000 (7,769,000) 31,136,000
Stock options exercised 9,000 34,000 -- 34,000
Conversion of subordinated
debentures 51,282 284,000 -- 284,000
Issuance of stock grants 66,667 16,000 -- 16,000
Compensatory warrant grants -- 332,000 -- 332,000
Net loss -- -- (6,336,000) (6,336,000)
---------- ----------- ---------- -----------
Balance at September 30, 1998 9,217,029 39,571,000 (14,105,000) 25,466,000
Private placement 1,200,000 5,456,000 -- 5,456,000
Investment in The Harvey
Entertainment Company 468,883 5,820,000 -- 5,820,000
Exercises of warrants 1,219,361 8,122,000 -- 8,122,000
Stock options exercised 317,309 857,000 -- 857,000
Issuance of stock grants 100,000 488,000 -- 488,000
Conversion of subordinated
debentures 1,288,185 9,336,000 -- 9,336,000
Compensatory option and
warrant grants -- 729,000 -- 729,000
Net earnings -- -- 4,471,000 4,471,000
---------- ----------- ---------- -----------
Balance at September 30,1999 13,810,767 $70,379,000 ($9,634,000) $60,745,000
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $4,471,000 ($6,336,000) ($4,369,000)
Adjustments to reconcile net earnings
(loss) to net cash used by operating
activities:
Minority interest in subsidiary net
losses (2,567,000) -- --
Gain on issuance of stock by
subsidiary (21,018,000) -- --
Gain on sale of interest in subsidiary (13,148,000) -- --
Dividend income (167,000) -- --
Equity in net losses (earnings) of
unconsolidated entities 520,000 330,000 (2,189,000)
Depreciation and amortization 435,000 530,000 192,000
Provisions and allowances 2,959,000 2,118,000 1,310,000
Amortization of capitalized issuance
costs 123,000 213,000 969,000
Issuance of stock grants 488,000 16,000 --
Compensatory options and warrants 729,000 332,000 --
Amortization of film costs 32,354,000 53,916,000 50,835,000
Changes in assets and liabilities:
Reserved cash (668,000) (379,000) (1,190,000)
Restricted cash (2,100,000) 39,000 4,021,000
Accounts receivable 7,413,000 (14,755,000) (6,121,000)
Due from related party 84,000 (1,708,000) 767,000
Film and television program costs (51,890,000) (59,182,000) (60,879,000)
Other assets 2,704,000 (130,000) --
Accounts payable and accrued
liabilities 5,303,000 1,608,000 (342,000)
Due to related party 502,000 -- --
Deferred revenue (483,000) 749,000 (98,000)
Contractual obligations (2,812,000) 6,901,000 2,643,000
Production advances (1,377,000) (3,533,000) 4,369,000
----------- ----------- -----------
Net cash used by operating activities (38,145,000) (19,271,000) (10,082,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of interest in
subsidiary, net 12,555,000 -- --
Investments in unconsolidated entities (1,767,000) (3,993,000) (3,432,000)
Purchases of property, plant and
equipment (610,000) (786,000) (157,000)
----------- ----------- -----------
Net cash provided (used) by investing
activities 10,178,000 (4,779,000) (3,589,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under notes payable 43,626,000 42,094,000 54,716,000
Repayment of notes payable (35,802,000) (31,864,000) (33,550,000)
Proceeds from subsidiary's issuance of
common stock 36,109,000 -- --
Proceeds from issuance of common stock 5,456,000 -- --
Proceeds from exercise of warrants and
stock options 8,979,000 34,000 --
Repayment of debentures (44,000) (36,000) --
Other -- -- 491,000
----------- ----------- -----------
Net cash provided by financing
activities 58,324,000 10,228,000 21,657,000
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 30,357,000 (13,822,000) 7,986,000
Cash and cash equivalents at beginning
of year 1,255,000 15,077,000 7,091,000
----------- ----------- -----------
Cash and cash equivalents at end of year $31,612,000 $1,255,000 $15,077,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The Company
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company which principally develops, produces, and
distributes original feature films and television programming. Feature
films are developed and produced principally for the theatrical, video
and pay cable motion picture markets. Television programming includes
television series, mini-series, movies for television, animation,
reality and game show programming.
The Company established feature film production operations in 1993. In
1994, an international theatrical film subsidiary was established to
expand into foreign theatrical distribution. In 1995, the Company
formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for
distribution through other delivery systems, including pay cable, pay-
per-view, basic cable, video-on-demand and satellite systems. In 1997,
the Company acquired control of US SEARCH.com Inc. ("US SEARCH.com"), a
leading provider of fee-based public record search and other customized
individual reference services. In November 1998 the Company launched a
24 hour Spanish language movie channel called Gran Canal Latino.
Fiscal Year
The Company's fiscal year ends on September 30. US SEARCH.com has a
December 31 fiscal year end, however its financial position and results
are consolidated herein from October 1 through September 30 of each
year. All references to years herein refer to the Company's fiscal
year end.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and all majority-owned subsidiaries. Entities in which
the Company holds a 20% to 50% interest are not consolidated, but are
accounted for under the equity method. Entities in which the Company
holds less than a 20% interest are accounted for under the cost method
and included in other assets. All significant intercompany balances
and transactions have been eliminated.
In 1995, the Company formed the 82.5%-owned subsidiary KLC/New City.
Since establishment, the Company has consolidated 100% of the net
losses of that subsidiary.
In November 1997, the Company acquired 80% of US SEARCH.com and
commenced consolidation of its accounts. US SEARCH.com has incurred
net losses since acquisition and the Company funded 100% of such losses
through its initial public offering (Note 2). The Company recognized
100% of the net losses through June 30, 1999. Subsequent to the public
offering, the Company has recognized a minority interest in the net
losses and equity of US SEARCH.com proportionate to the 44.8% minority
ownership percentage.
In November 1997, the Company established KL/Phoenix, an 80%-owned
joint venture for Latin American distribution of film and television
programs. In November 1998, the Company established Gran Canal Latino,
an 80%-owned joint venture for satellite broadcasting of Spanish and
Portuguese language film and television programs. Since establishment,
the Company has consolidated 100% of these ventures' net losses.
Reclassifications
Certain reclassifications have been made to conform prior year balances
with the current presentation.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Recognition
Revenues from feature film and television program distribution
licensing agreements are recognized on the date the completed film or
program is delivered or becomes available for delivery, is available
for exploitation in the relevant media window purchased by that
customer or licensee and certain other conditions of sale have been met
pursuant to criteria specified by SFAS No. 53, Financial Reporting By
Producers and Distributors of Motion Picture Films. Revenues from
barter transactions, whereby the program is exchanged for television
advertising time which is sold to product sponsors, are recognized when
the television program has aired and all conditions precedent have been
satisfied. The revenue cycle generally extends 7 to 10 years on film
and television products.
Producer fees received from production of films and television programs
for outside parties where the Company has no continuing ownership
interest in the project are recognized on a percentage-of-completion
basis as determined by applying the cost-to-cost method. The cost of
such films and television series is expensed as incurred.
US SEARCH.com generates revenues by performing various information
search services for customers. Revenue is recognized when the results
of the search services are delivered to clients. The terms of each
sale do not provide for client refunds after search services have been
delivered, however, in certain instances, where the clients indicate
that the initial search is unsuccessful, US SEARCH.com may perform, at
no charge to the client, up to three identical searches during the one
year period following their first search. The costs related to such
additional searches are recorded in the period of the initial sale and
are based upon the estimated number of additional searches. In
addition, where clients request to broaden the scope of their fully
automated searches, US SEARCH.com may apply up to a portion of the cost
of the client's fully automated searches towards the cost of the
broader and more extensive searches. The estimated credits are
recorded in the period of the initial sale and are based upon the
amount estimated to be redeemed by clients. To date, the costs of
additional searches and estimated credits to be provided in future
periods have not been material.
Advertising Costs
US SEARCH.com's advertising production costs are expensed the first
time the advertisement is run. Media costs are expensed in the month
the advertising appears. Advertising expense related to US SEARCH.com
for fiscal 1999 and 1998 was $15,592,000 and $5,200,000, respectively.
Concentration of Risk
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. Cash and cash equivalents are deposited
throughout the world with high credit quality financial institutions.
The Company's customers are located throughout the world. For certain
revenue streams, the Company does not require guarantee of payment and
establishes an allowance for doubtful accounts based upon historical
trends and other information. To date, such losses have been within
management's expectations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Restricted and Reserved Cash
At September 30, 1999 and 1998, the Company had $ 2,088,000 and
$1,988,000, respectively, in restricted cash related to deposits held
at a British bank pursuant to film sale/leaseback transactions, and
$2,000,000 which are restricted deposits of US SEARCH.com pledged as
collateral on an outstanding letter of credit related to a recent lease
of a facility. In addition, the Company has $734,000 in cash collected
and reserved for use by Chase Manhattan Bank to be applied against the
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company's outstanding borrowings under the terms of the Company's
credit facility ($66,000 at September 30, 1998).
Allowances for Doubtful Accounts
The Company provides for doubtful accounts based on historical
collection experience and periodically adjusts the allowance based on
the aging of accounts receivable and other conditions. Receivables are
written off against the allowance in the period they are deemed
uncollectible.
Accounting for Film and Television Program Costs
The Company capitalizes direct costs incurred to produce a film or
television project. The costs include interest expense funded under
production loans, certain exploitation costs and production overhead.
Capitalized exploitation or distribution costs include prints and
advertising that is expected to benefit the film in future markets.
These costs, including management's estimates of anticipated total
costs, are amortized each period on an individual film or television
program basis in the ratio that the current period's gross revenues
from all sources for the program bear to management's estimate of
anticipated total gross revenues for such film or program from all
sources. Revenue estimates are reviewed quarterly and adjusted where
appropriate.
Film and television program costs are stated at the lower of
unamortized cost or estimated net realizable value. Losses are charged
to operations through additional amortization.
Investments in Equity Securities - Cost Method
In April 1999, the Company issued 468,883 shares of common stock with a
value of $5,820,000 to The Harvey Entertainment Company ("Harvey") in
exchange for convertible preferred stock and detachable warrants. The
investment is not subject to Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," as the Harvey preferred stock is not publicly
traded.
The preferred stock is convertible into publicly traded common shares
of Harvey and earns mandatory dividends payable in cash or additional
shares of Harvey preferred stock. As of September 30, 1999 the Company
earned approximately $167,000 of dividends in the form of additional
Harvey preferred shares.
The detachable warrants are convertible into Harvey common stock and
were fully exercisable at issuance. At September 30, 1999, the Company
has warrants exercisable into 388,235 shares of Harvey common stock.
The warrants begin to expire in 2005.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
based upon the estimated useful lives of the assets. Leasehold
improvements and equipment under capital leases are amortized over the
shorter of the estimated useful life or the life of the lease.
Depreciation and amortization periods by asset category are as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment 3 - 10 years
Furniture and fixtures 5 - 7 years
Leasehold improvements Shorter of useful life or lease term
Equipment under capital lease Shorter of useful life or lease term
</TABLE>
Maintenance and repairs are charged to expense as incurred while
renewals and improvements are capitalized. Upon the sale or retirement
of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation, with any resulting gain or loss
included in the Statement of Operations.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Lived Assets
The carrying value of long-lived assets, consisting primarily of
investments and property and equipment, is periodically reviewed by
management. The Company records impairment losses on long-lived assets
when events or circumstances indicate that such assets might be
impaired. Measurement of any impairment would include a comparison of
estimated future cash flows anticipated to be generated during the
remaining life of the long-lived asset to the net carrying value of the
long-lived asset.
Participants' Share Payable and Talent Residuals
The Company charges profit participation and talent residual costs to
expense in the same manner as amortization of film and television
program costs. Payments for profit participations are made in
accordance with the participants' contractual agreements. Payments for
talent residuals are remitted to the respective guilds in accordance
with the provisions of their union agreements.
Production Advances
The Company receives license fees for projects in the production phase.
Production advances are generally nonrefundable and are recognized as
earned revenue when the film or television program is available for
delivery.
International Currency Transactions
The majority of the Company's foreign sales transactions are payable in
U.S. dollars. Accordingly, international currency transaction gains
and losses included in the consolidated statements of operations for
the three years ended September 30, 1999 were not significant.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
the tax bases of assets and liabilities using enacted tax rates in
effect for the period in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ
from estimated amounts.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost, if any, is
recognized over the respective vesting period based upon the difference
on the grant date between the fair value of the Company's common stock
and the grant price. Pro forma disclosures reflect stock option grants
subsequent to fiscal 1996.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of Financial Instruments
The recorded value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, contractual
obligations and participants' share payable for talent residuals
approximate their fair value due to the relatively short maturities of
these instruments. The fair value of notes payable and convertible
subordinated debentures approximates the recorded value due to the
stated interest rate on such instruments and the indeterminate nature
of the value of the convertibility feature of such debt instruments.
Reverse Stock Split
In September 1997 the Company effected a 1-for-6 reverse split of the
issued and outstanding shares of common stock. All references to
shares outstanding give effect to this reverse stock split as if it had
occurred at the beginning of the earliest period presented.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed using the weighted
average number of common shares outstanding during the period. Diluted
net earnings (loss) per share is computed using the weighted average
number of common shares and common equivalent shares outstanding during
the period. Common equivalent shares related to options and warrants
are excluded from the computation when their effect is antidilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement
established standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from
investments by, or distributions to, shareholders. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and
requires restatement of earlier periods presented. SFAS No. 130
defines comprehensive income as net income plus all other changes in
equity from nonowner sources. The Company had no other comprehensive
income items and accordingly net income equals comprehensive income.
Segment Reporting
The company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" for the year ended September 30, 1999. Comparative fiscal
1998 and 1997 disclosures have been included. SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable
segments. SFAS No. 131 also requires disclosures about products or
services, geographic areas, and major customers. The Company's
management reporting structure provides for two reportable segments.
(2) Subsidiary Public Offering
On June 25, 1999 US SEARCH.com consummated its initial public offering
("offering") and issued 4,500,000 new shares of its common stock to the
public. US SEARCH.com obtained $36,109,000 in net proceeds related to
the offering. US SEARCH.com is traded on the NASDAQ National Market
under the symbol "SRCH."
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Concurrent with the offering, the Company exercised warrants to
purchase 1,360,173 additional shares of US SEARCH.com common stock for
$2,752,000. The Company has no remaining warrants to purchase
additional common stock of US SEARCH.com.
In conjunction with the offering, the Company sold 1,500,000 of its
shares in US SEARCH.com to the public in exchange for net proceeds of
$12,555,000. The Company recognized a $13,148,000 pre-tax gain on the
sale of the 1,500,000 shares.
Subsequent to the offering, the Company retains a 55.2% interest in the
subsidiary. The Company recognized a $21,018,000 pre-tax gain based on
its revised proportionate share in the subsidiary's increased net
equity.
(3) Film and Television Program Costs
Film and television program costs consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------- -----------
<S> <C> <C>
In process or development $20,472,000 $10,570,000
Released, net of accumulated amortization 71,027,000 63,203,000
----------- -----------
Total $91,499,000 $73,773,000
=========== ===========
</TABLE>
Based upon present estimates of anticipated future revenues at
September 30, 1999, approximately 70% of the costs related to released
films and television programs will be amortized during the three-year
period ending September 30, 2002.
The Company capitalized interest of $372,000, $982,000 and $1,429,000
to film and television program costs for the years ended September 30,
1999, 1998, and 1997, respectively. During the same respective
periods, $8,154,000, $7,243,000 and $5,456,000 of total interest costs
were incurred.
(4) Investments in Unconsolidated Entities, at Equity
Significant investments in unconsolidated entities are accounted for
under the equity method ("equity affiliates"). These entities are
principally engaged in the production and distribution of films and
television programs. The Company's share of earnings of these equity
affiliates is included in income as earned. Investments in equity
affiliates at September 30 consist of the following:
<TABLE>
<CAPTION>
Ownership Percentage 1999 1998
-------------------- ----------- -----------
<S> <C> <C> <C>
BLT Ventures 50% $808,000 $827,000
Cracker Company LLC 50% 5,829,000 5,648,000
TV First 50% 357,000 520,000
Grendel Productions LLC 25% 2,161,000 2,093,000
Swing Ventures 50% 1,188,000 1,230,000
Trick Productions 50% 1,047,000 --
Others 20%-50% 655,000 480,000
----------- ----------
$12,045,000 $10,798,000
=========== ===========
</TABLE>
The summarized unaudited information below at September 30 represents an
aggregation of the Company's equity affiliates:
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Financial Information (unaudited)
<TABLE>
<CAPTION>
Balance Sheet Data 1999 1998
----------- -----------
<S> <C> <C>
Assets $22,710,000 $30,375,000
Liabilities 4,133,000 9,238,000
Net assets 18,577,000 21,137,000
Company's equity in net assets 12,045,000 10,798,000
</TABLE>
<TABLE>
<CAPTION>
Earnings Data 1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Operating revenues $4,229,000 $31,871,000 $24,681,000
Gross profit (293,000) 963,000 4,403,000
Net (losses) earnings $(1,168,000) $972,000 $4,378,000
Company's equity in net (losses)
earnings $(520,000) $(330,000) $2,189,000
</TABLE>
No dividends were received from equity affiliates for the years ended
September 30, 1999, 1998, or 1997.
(5) Credit Agreement and Financing Arrangements
Credit arrangements and borrowings consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------ -----------
<S> <C> <C>
Note payable to bank, under a revolving credit
facility collateralized by substantially all
Company assets, interest at Libor (5.38% at
September 30, 1999) plus 3%, outstanding
principal balance due June 2000 $66,455,000 $58,980,000
Notes payable to banks and/or financial
institutions consisting of production loans
principally collateralized by film rights,
interest at rates from Libor (5.38% at
September 30, 1999) plus 2% to Prime (8.25% at
September 30, 1999) plus 2.5%, and maturities
at varying dates through June 2000 16,272,000 13,432,000
Series A Convertible Subordinated Debentures
due December 2000, bearing interest at 10%
per annum payable June 15 and December 15, net -- 73,000
Series B Convertible Subordinated Debentures
due December 2000, bearing interest at 13- 3/4%
per annum payable monthly, net 1,535,000 3,061,000
8% Convertible Subordinated Debentures due
December 2000, interest payable February 1 and
August 1, net 734,000 4,513,000
9% Convertible Subordinated Debentures due July
2002, interest payable January 1 and July 1, net -- 3,879,000
Trade notes payable and debt of US SEARCH.com 198,000 739,000
------------ -----------
Total credit agreements and financing
arrangements $85,194,000 $84,677,000
=========== ===========
Total notes payable $82,925,000 $73,151,000
=========== ===========
Total convertible subordinated debentures,
net of deferred issuance costs $2,269,000 $11,526,000
=========== ===========
</TABLE>
At September 30, 1999 the Company had a $75,000,000 revolving credit
facility with a syndicated group of banks. Chase Manhattan Bank is the
agent bank. Unused borrowings on this facility were $1,148,000 at
September 30, 1999. The credit facility expires in June 2000. The
Company is currently in negotiations to extend the revolving facility
beyond its
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
current maturity date, however no agreement has been executed. The
credit agreement contains restrictive covenants which include, but are
not limited to, limitations on additional indebtedness, liens,
investments, disposition of assets, guarantees, deficit financing,
capital expenditures, affiliate transactions and the use of proceeds,
and prohibit the payment of cash dividends and prepayment of most
subordinated debt. In addition, the Company must maintain a minimum
liquidity level, limit overhead expense and to meet certain financial
ratios. The bank could declare an event of default if either of
Messrs. Locke or Kushner failed to be the Chief Executive Officer of
the Company or if any person or group acquired ownership or control of
capital stock of the Company having voting power greater than the
voting power at the time controlled by Messrs. Kushner and Locke
combined (other than any institutional investor able to report its
holdings on Schedule 13G which holds no more than 15% of such voting
power). The Company received a waiver of default due to non-compliance
with an overhead covenant for fiscal 1999.
At September 30, 1999, the Company had outstanding $16,272,000 of
production loans to consolidated entities from Comerica Bank -
California ("Comerica") and Far East National Bank. The unused portion
of credit available under these production loans at September 30, 1999
was $671,000. The Company provided $2,100,000 in corporate guarantees
for loans to consolidated entities and $400,000 for one loan to an
equity affiliate. The guarantees are callable in the event the
respective borrower does not repay the loan made by the respective
maturity date. Deposits paid by distributing licensees prior to the
delivery of the financed pictures are held as restricted cash
collateral by the lenders.
In April 1999 the Company called the Series A Debentures for
redemption. In May 1999, $49,000 of principal was converted into 6,435
newly-issued shares of common stock at a rate of $7.61 per share, and
the remaining $28,000 was redeemed. Approximately $2,000 of
capitalized issuance costs were amortized under the straight-line
method as interest expense during each of the years ended September 30,
1999 and 1998.
During the year ended September 30, 1999, $1,616,000 of the Series B
Debentures principal were converted into 174,382 newly-issued shares of
common stock of the Company at a rate of $9.2664 per share.
Unamortized discounts were $38,000 at September 30, 1999.
Approximately $49,000 and $68,000 of these costs were amortized under
the straight-line method as interest expense for the years ended
September 30, 1999 and 1998, respectively.
During the year ended September 30, 1999, $3,948,000 of the 8%
Debentures principal were converted into 674,873 new-issued shares of
common stock at a rate of $5.85 per share. Unamortized discounts were
$18,000 at September 30, 1999. Approximately $43,000 and $86,000 of
these costs were amortized under the straight-line method as interest
expense for the years ended September 30, 1999 and 1998, respectively.
The Company has the right to redeem the debentures at a redemption
price of 100% of par commencing in February 2000.
During the year ended September 30, 1999, all of the 9% Debentures were
converted into 432,495 newly-issued shares of common stock at a rate of
$9.48 per share. Approximately $29,000 and $59,000 of capitalized
issuance costs were amortized under the straight-line method as
interest expense for the years ended September 30, 1999 and 1998,
respectively.
The debentures are subordinated to all existing and future senior
indebtedness. The term senior indebtedness includes principal and
interest on all indebtedness of the Company to banks, insurance
companies and similar institutional lenders, and to the public for
securities registered under the Securities Act of 1933. Senior
indebtedness does not include other debentures, indebtedness to
affiliates and indebtedness expressly subordinated to or on parity with
the debentures.
Credit arrangements and borrowings are due as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30, Amount
- ----------------------------------------------------------------------------
<S> <C>
2000 $82,875,000
2001 2,319,000
----------------
Total $85,194,000
================
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(6) Income Taxes
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal $186,000 $154,000 $ --
State 540,000 27,000 23,000
--------- --------- ----------
726,000 181,000 23,000
Deferred:
Federal -- -- --
State -- -- --
--------- --------- ----------
Total income tax expense $726,000 $181,000 $23,000
========= ========= ==========
</TABLE>
A reconciliation of the statutory Federal income tax rate to the effective
rate is presented below:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Statutory Federal income tax rate 34% (34)% (34)%
Alternative minimum taxes and permanent
differences 3 2 --
Change in valuation allowance (30) 34 34
State income taxes, net of Federal tax
benefit 6 1 1
--------- --------- ----------
13% 3% 1%
========= ========= ==========
</TABLE>
Significant components of deferred tax assets and liabilities, using enacted
tax rates, are as follows:
<TABLE>
<CAPTION>
At September 30,
--------------------------
1999 1998
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and credits $13,589,000 $13,299,000
Allowance for doubtful accounts and other
reserves 1,169,000 695,000
Deferred film license fees 1,306,000 1,571,000
Other temporary differences 1,953,000 265,000
Depreciation 85,000 53,000
State taxes 212,000 --
------------- ------------
Total gross deferred assets 18,314,000 15,883,000
Valuation allowance (5,432,000) (7,694,000)
------------- ------------
Net deferred tax assets $12,882,000 $8,189,000
============= ============
Deferred tax liabilities:
Film amortization $5,150,000 $7,239,000
Partnerships 94,000 721,000
Deferred gain on sale of subsidiary stock 7,638,000 --
State taxes -- 229,000
------------- ------------
Total deferred tax liabilities $12,882,000 $8,189,000
============= ============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. Due to the uncertainty
surrounding the realizability of the net deferred tax assets, a full
valuation allowance has been established as management believes that it
is more likely than not, based upon available evidence, that the
deferred tax assets will not be realized.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Due to the sale of US SEARCH.com common stock in connection with the
subsidiary's initial public offering in June 1999, effective July 1999,
US SEARCH.com will no longer join the Company in filing of a
consolidated income tax return. Accordingly, as of September 30, 1999,
the Company and US SEARCH.com had net operating loss and tax credit
carry-forwards as follows:
<TABLE>
<CAPTION>
Amount Expiration
----------------------------- Date
Kushner-Locke US SEARCH.com Beginning
-------------- ------------- ----------
<S> <C> <C> <C>
NOLs for Federal tax purposes $20,580,000 $14,788,000 Fiscal 2008
NOLs for state tax purposes -- 9,198,000 Fiscal 2004
International tax credits 122,000 -- Fiscal 2000
General business credits 197,000 -- Fiscal 2003
Alternative minimum tax credits 437,000 -- N/A
</TABLE>
(7) Warrants and Stock Options
Warrants
A summary of exercisable warrants at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Warrant Holder Amount Exercise Price Expiration Date
- ------------------------------------- --------------- ------------------
<S> <C> <C> <C>
Allen &Company warrants 500,000 $2.0625 September 2004
Friedman warrants 50,000 $2.0625 September 2004
Friedman consulting warrants 35,000 $1.6875 June 2002
---------
585,000
=========
</TABLE>
In 1994, in connection with the 8% Convertible Subordinated Debentures
offering, the Company issued warrants to the underwriter to purchase up
to $1,643,700 of the aggregate principal amount of the debentures at an
exercise price equal to 120% of the principal amount of the debentures,
subject to adjustment in certain circumstances. The warrants were
fully exercised in fiscal 1999 for $1,775,000 and the Company issued
new shares of common stock.
In 1994, in connection with the 9% Convertible Subordinated Debenture
offering, the Company issued warrants to the underwriters to purchase
up to $505,000 of the aggregate principal amount of the debentures sold
at an exercise price equal to 120% of the principal amount of the
debentures, subject to adjustments in certain circumstances. The
warrants were exercisable through July 1999, when they expired
unexercised.
In 1996 the Company had a public offering of 4,750,000 units (the "unit
offering"). Each unit consisted of two pre-reverse split shares of
common stock and one Class C Redeemable Common Stock Purchase Warrant
to purchase one share of common stock, at an exercise price of $6.8625
per share, as adjusted. In connection with the unit offering, the
Company issued warrants to the underwriter to purchase 71,167 units at
an adjusted exercise price of $19.1825 each (the "Underwriter
Warrants"). In addition, the Company issued warrants to a consultant
to purchase 47,500 units at the same exercise price (the "Consultant
Warrants").
In April 1999, the Company called all Class C Warrants for redemption
in May 1999. Included in the redemption were the Class C Warrants
issued as a part of the Underwriter Warrants and Consultant Warrants.
The Company issued 794,215 shares of common stock and received proceeds
of $5,419,000 from the exercise of the Class C Warrants. A total of
14,410 warrants were redeemed at a total cost of $1,441.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In June 1997 the Company issued warrants to I. Friedman Equities, Inc.
(the "Friedman consulting warrants") to purchase up to 50,000 shares of
common stock. In September 1997, the Company issued additional
warrants to I. Friedman Equities, Inc. of 50,000 (the "Friedman
warrants"). In August 1999, 15,000 Friedman consulting warrants were
exercised.
In September 1997, in connection with a consulting agreement, the
Company issued warrants to Allen & Company, Incorporated (the "Allen &
Company Warrants") to purchase 500,000 share of common stock. The
value assigned to the warrants of $1,339,000 is recorded as consulting
expense over the term of the agreement with a portion allocated to the
private placement financing consummated in fiscal 1999. For the years
ended September 30, 1999 and 1998, the Company recognized consulting
expense of $579,000 and $332,000, respectively. The Company will
recognize the remaining $230,000 of consulting expense during the year
ended September 30, 2000. At September 30,1999, the warrants were
fully vested.
Options
In 1989, the Board of Directors approved a stock incentive plan (the
"Plan") that covers directors, third party consultants and advisors,
independent contractors, officers and other employees of the Company.
In April 1999 the stockholders approved an increase in the number of
shares of Common Stock reserved for issuance from 1,250,000 shares to
1,820,000 shares. The Plan allows for the issuance of options to
purchase shares of the Company's common stock at an exercise price at
least equal to the fair value of the stock on the date of grant.
Options generally vest over a three year term subject to continued
employment or the completion of services rendered, and have a maximum
term of ten years. The Company granted options during the years ended
September 30, 1999, which resulted in compensation of $150,000. There
were no option grants which resulted in compensation expense for the
years ended September 30, 1998 or 1997. At September 30, 1999, 1,509
shares remained available for future grant.
The following table summarizes stock option activity for the period
from September 30, 1996 to September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price per Share Prices
-----------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 699,519 $1.50 - $11.64 $5.95
Granted Fiscal 1997 466,673 $1.88 - $2.81 $1.97
Options Expired/Canceled (70,833) $4.50 - $15.18 $7.84
-----------
Balance at September 30, 1997 1,095,359 $1.50 - $11.64 $4.65
Granted Fiscal 1998 121,668 $1.50 - $4.00 $2.65
Options Expired/Canceled (112,501) $2.63 - $6.36 $3.98
Options Exercised (9,000) $3.75 $3.75
-----------
Balance at September 30, 1998 1,095,526 $1.50 - $11.64 $2.93
Granted Fiscal 1999 502,243 $2.97 - $10.25 $4.63
Options Exercised (317,309) $1.50 - $6.36 $2.74
-----------
Balance at September 30, 1999 1,280,460 $1.50 - $11.64 $4.42
===========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additional information with respect to the outstanding options as of
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices: Shares Life Price Shares Price
- --------------- ---------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$1.50- $3.00 465,110 7.55 years $1.95 277,335 $1.94
$3.01 - $6.00 613,332 6.86 years $4.84 610,832 $4.84
$6.01 - $11.64 202,018 4.71 years $8.88 172,018 $9.17
---------- ----------
1,280,460 1,060,185
========== ==========
</TABLE>
Options exercisable at September 30, 1998 and 1997 were 671,087 and
528,141, respectively. The weighted average exercise price of these
exerciseable options at September 30, 1998 and 1997 were $4.79 and
$6.16, respectively.
The pro forma effects of applying SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1999 1998 1997
---------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $4,471,000 $(6,336,000) $(4,369,000)
========== =========== ===========
Pro forma $3,689,000 $(6,662,000) $(4,577,000)
========== =========== ===========
Earnings (loss)
per share As reported $.38 $(.69) $(.49)
========== =========== ===========
Pro forma $.31 $(.73) $(.51)
========== =========== ===========
</TABLE>
The pro forma disclosure of applying SFAS No. 123 is estimated on the
option's date of grant using assumptions of the expected term to
exercise, volatility, risk-free rate, and the expected dividend yield.
A summary of these assumptions is as follows:
<TABLE>
<CAPTION>
Dividend
Expected Term Volatility Risk-free Rate Yield
-------------- ----------- --------------- --------
<S> <C> <C> <C> <C>
Fiscal 1999 10 years 71.6%-76.2% 5.11%-7.09% 0%
Fiscal 1998 10 years 71.6% 5.67%-5.89% 0%
Fiscal 1997 10 years 71.6% 6.22%-6.99% 0%
</TABLE>
US SEARCH.com Stock Incentive Plan
US SEARCH.com has a stock incentive plan administered by the US
SEARCH.com Compensation Committee. US SEARCH.com has authorized for
issuance 2,600,650 options under this plan. At September 30, 1999,
189,820 options issued under this plan are potentially dilutive to the
Company's current ownership percentage of 55.2%.
(8) Commitments and Contingencies
Compensation
Messrs. Kushner and Locke entered into employment agreements which
expire in March 2004. Those agreements provide for base compensation
to each individual of $475,000, $500,000, $525,000, $550,000 and
$575,000 in the fiscal years ended September 30, 2000, 2001, 2002, 2003
and 2004, respectively. The Company also provides Messrs. Kushner and
Locke with certain fringe benefits, including $3,500,000 of term life
insurance with a split dollar ownership structure and disability
insurance for each person.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has agreements with twelve other employees and officers of
the Company, including consolidated subsidiaries, which provide for
annual base salaries each ranging from $150,000 to $400,000,
eligibility for options, performance bonuses, and severance payments.
Employee Benefit Plans
The Company participates in various multiemployer defined benefit and
defined contribution pension plans under union and industry agreements.
These plans include substantially all temporary film production
employees covered under various collective bargaining agreements. The
Company incurred $425,000, $345,000, and $378,000 of multiemployer plan
costs in fiscal 1999, 1998, and 1997, respectively. Such costs are
capitalized as a component of film and television programming costs.
The Company funds the costs of such plans as incurred.
Leases
The Company and its subsidiaries lease certain facilities and
equipment. The leases generally provide for the lessee to pay taxes,
maintenance, insurance and certain other operating costs of the leased
property.
At September 30, 1999, the future minimum payments under leases that
have initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending September 30, Leases Leases
- ---------------------------------------------------------------------
<S> <C> <C>
2000 $228,000 $1,615,000
2001 193,000 1,884,000
2002 35,000 1,770,000
2003 9,000 1,804,000
2004 -- 1,848,000
Thereafter -- 729,000
-------- ----------
Total minimum future lease rental payments 465,000 $9,650,000
Less: amounts representing interest (22,000) ==========
--------
Capitalized lease obligations, included within
Contractual obligations in the consolidated
balance sheet at September 30, 1999 $443,000
========
</TABLE>
Rental expense for all operating leases for the years ended September
30, 1999, 1998 and 1997 was approximately $678,000, $657,000 and
$541,000, respectively.
Commitments of US Search.com
US SEARCH.com has several cancelable and noncancelable agreements with
data suppliers and various Internet companies. The Company also has
cancelable and noncancelable broadcast and cable advertising
commitments. At September 30, 1999, the minimum noncancelable payments
required under these agreements are approximately:
<TABLE>
<CAPTION>
Year ending September 30, Amount
----------------------------------------------
<S> <C>
2000 $15,940,000
2001 $8,600,000
2002 $5,950,000
2003 $4,200,000
2004 $4,200,000
Thereafter $1,050,000
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Film and Television Program Production
The Company has certain films and television projects in development
(Note 3). The Company routinely makes contractual down payments to
acquire film distribution rights. This initial advance for rights
ranges from 10% to 30% of the total purchase price. The balance of the
payment is generally due upon the complete delivery by third party
producers of acceptable film and video materials and other proof of
rights held and insurance policies that may be required for the Company
to begin exploitation of the product.
Litigation
The Company is involved in certain legal proceedings and claims arising
out of the normal course of business. Management believes the
resolution of these matters will not have a material adverse effect
upon the Company's results of operations, financial position or cash
flows.
(9) Related Party Transactions
In fiscal 1997 and 1998 Messrs. Kushner and Locke each earned annual
base compensation of $425,000. In fiscal 1999 Messrs. Kushner and
Locke each earned base compensation at an annual rate of $450,000
through March 1999 and $475,000 thereafter. In August 1997, the
Company granted to each of Messrs. Kushner and Locke options to
purchase 166,666 shares of common stock. In March 1999, the Company
granted to each of Messrs. Kushner and Locke 50,000 shares of
restricted common stock and accelerated the vesting of 33,333 then
unvested stock options. In September 1999, the Company granted to each
of Messrs. Kushner and Locke bonuses of $500,000 and options to
purchase 100,000 shares of common stock.
The following is a summary of stock and option compensation to each of
Messrs. Kushner and Locke for the three year period ended September 30,
1999:
<TABLE>
<CAPTION>
Options/ Vested, net of
Shares Exercise exercise at Vesting
Grant Date Issued Price September 30, 1999 Required
- --------------- ---------- --------- ------------------ -----------
<S> <C> <C> <C> <C>
August 1997 83,333 $1.875 50,000 (1)
August 1997 83,333 $1.875 83,333 (2)
February 1999 50,000 N/A N/A (3)
September 1999 100,000 $4.6875 100,000 (4)
</TABLE>
__________________
(1) Originally vested over five years commencing each anniversary of
the grant date. Vesting of options for 33,333 shares was accelerated
in March 1999. The difference in intrinsic value of these options
between the grant date and the date of accelerated vesting is $277,000.
(2) Achievement of profit targets set by the Board of Directors or the
price of the Company's common stock reaching trading prices between
$3.00 and $6.00 per share; portions accelerated in March 1999.
(3) Restrictions removed in June 1999.
(4) Immediately vested upon grant.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Outside directors each receive annual compensation between $15,000 and
$25,000 in cash. The following is a summary of option compensation to
outside directors for the three year period ended September 30, 1999.
<TABLE>
<CAPTION>
Vested, net
of exercises
Options Exercise at September Vesting
Holder Grant Date Issued Price 30, 1999 Required
- --------------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Irwin Friedman June 1998 16,667 $2.8438 5,556 (1)
Irwin Friedman February 1999 13,333 $7.19 13,333 (2)
Irwin Friedman September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch August 1997 16,667 $1.875 16,667 (1)
Stuart Hersch February 1999 13,333 $7.19 13,333 (2)
Stuart Hersch September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch September 1999 40,000 $4.8125 40,000 (2)
John Lannan June 1998 16,667 $2.8438 11,111 (1)
John Lannan February 1999 13,333 $7.19 13,333 (2)
John Lannan September 1999 13,333 $4.8125 13,333 (2)
</TABLE>
__________________
(1) Vests one-third at grant date and one-third over next two
anniversaries of the grant date.
(2) Immediately vested upon grant.
The Company loaned the President and Chief Operating Officer a total of
$300,000 in September and October 1996. The loan bears interest at 8%
per year and is due through October 2001. Pursuant to his employment
contract, during fiscal 1998 and fiscal 1999 $50,000 and $100,000
principal amounts of the loan, respectively, plus interest on such
amounts, were forgiven and recorded as additional compensation expense.
The unpaid principal balance at September 30, 1999 was $150,000.
During 1989, the Company entered into a consulting agreement with
Stuart Hersch, a director of the Company. The agreement is on a month-
to-month basis. For the years ended September 30, 1997, 1998 and 1999
the Company recognized $90,000, $90,000 and $71,000 respectively, in
consulting expense under this agreement. Mr. Hersch sold 8,333 shares
of the Company's common stock in December 1997 at $3.625 per share.
Since 1991 Irwin Friedman, a director of the Company, has rendered
financial consulting services to the Company through the firm I.
Friedman Equities, Inc. During 1997 in connection with rendering
certain services, that firm was granted warrants exercisable for
100,000 shares of common stock (Note 7). For the years ended September
30, 1997, 1998 and 1999 the Company recognized $72,000, $24,000 and
$48,000, respectively, in consulting expense under various agreements
with that firm. During the year ended September 30, 1999, I. Friedman
Equities, Inc. was also paid $62,000 pursuant to a 1996 agreement in
connection with the redemption of Class C Common Stock Warrants, and
that amount was charged to stockholders' equity.
In December 1994, the Company loaned August Entertainment, Inc.
("August") $650,000 against distribution rights to third party product.
August is majority owned by Gregory Cascante, former President of the
Company's international film distribution division. The loan bore
interest at the lesser of (a) Prime plus 2% or (b) 10%. In January
1999 the loan was assigned to a subsidiary, and was used to reduce pre-
existing obligations to August.
From May 1997 to October 1997, Peter Locke (co-chairman of US
SEARCH.com and the Company) personally loaned to US SEARCH.com amounts
aggregating approximately $397,000 (gross of any repayments which
occurred during such period). The loans with interest at 10% per annum
were repaid in full. In addition, US SEARCH.com paid approximately
$40,000 in consulting fees and interest to Mr. Locke for services
rendered through December 31, 1997.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
US SEARCH.com loaned approximately $41,000 in 1995, $176,000 in 1996
and $32,000 in 1997, to an existing stockholder and co-founder of US
SEARCH.com (the "Stockholder"). US SEARCH.com received repayments of
approximately $5,000 in 1995 and $3,000 in 1996 from Stockholder. In
June 1997, the Stockholder personally assumed US SEARCH.com's
obligations under a $296,000 promissory note payable to a former
stockholder of US SEARCH.com (the "Related Loan"). In consideration of
the Stockholder's assumption of US SEARCH.com's obligations under the
Stockholder Loan, the prior outstanding amounts loaned to this
Stockholder were repaid in full and an amount payable to Stockholder
was established to the extent the assumption of the Related Loan
exceeded loans made to the Stockholder. In September 1998, in
connection with US SEARCH.com's amended and restated employment
agreement with the Stockholder, US SEARCH.com agreed to assume the
Stockholder's obligations on the Related Loan. The assumption resulted
in a $296,000 compensation charge recorded in general and
administrative expenses in the year ended September 30, 1999.
An affiliate of a former stockholder/executive officer of US SEARCH.com
lent this subsidiary $50,000 in December 1996 and $50,000 in May 1997,
bearing interest at 20% per annum and payable in six monthly
installments of $10,000 each (including interest). US SEARCH.com
subsequently defaulted in its obligations under these notes. In
January 1998, the notes were restructured providing for the payment of
$120,000, including all past and future interest, in 36 equal monthly
installments of approximately $3,333 each, beginning in January 1998,
and guaranteed by the Company. As of September 30, 1999, US SEARCH.com
owed $70,000 under this note.
(10) Segment Information
Prior to fiscal 1998, the Company operated in one business segment,
film and television programs. Early in fiscal 1998 the Company
obtained controlling interest in US SEARCH.com. The Company
subsequently operated in two segments: film and television program
production and distribution, and search services related to US
SEARCH.com. Each segment is a strategic business unit that offers
different products and services. They are managed separately because
each requires different investment, technology and marketing
strategies. Management evaluates business segment performance based on
operating revenues, operating earnings and asset growth.
The film and television program business segment exploits distribution
rights in its film and television program libraries, films and
television programs produced by the Company or co-produced with equity
affiliates, and film and television programs produced by third parties.
Products are licensed in both the United States and virtually all
international markets.
The search services business segment consists solely of the Company's
interest in US SEARCH.com, which provides people search and customized
individual reference services. Services are provided almost
exclusively to United States customers.
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information regarding the Company's business
segments is shown in the table below.
<TABLE>
<CAPTION>
Film and Search
television services Consolidated
----------- ----------- ------------
<S> <C> <C> <C>
Fiscal 1999:
Operating revenues $34,143,000 $15,747,000 $49,890,000
Gross profit 917,000 9,307,000 9,704,000
Earnings (loss) before income taxes 16,539,000 (11,342,000) 5,197,000
Total assets 154,627,000 30,488,000 185,115,000
Fiscal 1998:
Operating revenues 68,261,000 7,869,000 76,130,000
Gross profit 10,223,000 4,280,000 14,503,000
(Loss) before income taxes (1,419,000) (4,736,000) (6,155,000)
Total assets 134,319,000 2,786,000 137,105,000
Fiscal 1997:
Operating revenues 54,746,000 -- 54,746,000
Gross profit 2,662,000 -- 2,662,000
(Loss) before income taxes (4,346,000) -- (4,346,000)
Total assets 124,368,000 -- 124,368,000
</TABLE>
Geographic Data
The revenues of equity affiliates are generated worldwide and their
operations are principally located in the United States. The table
below presents sources of operating revenue by country or territory for
the Company and consolidated subsidiaries. Equity affiliates are not
included.
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $33,862,000 $40,251,000 $24,489,000
Germany 4,420,000 12,954,000 5,873,000
France 281,000 2,302,000 1,036,000
Great Britain 1,712,000 1,596,000 1,310,000
Latin America 5,625,000 3,574,000 766,000
Australia 719,000 2,181,000 2,985,000
Japan 637,000 3,077,000 1,985,000
Spain -- 3,289,000 6,347,000
Italy 383,000 3,463,000 1,545,000
Other foreign countries or territories 2,251,000 3,443,000 8,410,000
----------- ----------- -----------
Total revenues $49,890,000 $76,130,000 $54,746,000
=========== =========== ===========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents film and television program costs and total
assets based upon their geographic location:
<TABLE>
<CAPTION>
United Latin Great
States America Britain Total
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
September 30, 1999:
Film and television
program costs $89,163,000 $2,508,000 $-- $91,499,000
Total assets 179,864,000 3,163,000 2,088,000 185,115,000
September 30, 1998:
Film and television
program costs 73,773,000 -- -- 73,773,000
Total assets 132,756,000 2,361,000 1,988,000 137,105,000
September 30, 1997:
Film and television
program costs 68,507,000 -- -- 68,507,000
Total assets 122,759,000 -- 1,609,000 124,368,000
</TABLE>
Customer Concentration
For the year ended September 30, 1999, sales to one United States film
and television program customer represented 18% of the Company's
consolidated operating revenues. At September 30, 1999, accounts
receivable from two customers represented 31% of the Company's
consolidated accounts receivable. For the year ended September 30,
1998, sales to two international film and television program customers
represented 26% of the Company's consolidated operating revenues. At
September 30, 1998, accounts receivable from two customers represented
41% of the Company's consolidated accounts receivable. There were no
customer concentrations for the year ended September 30, 1997.
(11) Earnings (Loss) Per Share
The table below reconciles net earnings (loss) and average shares of
common stock outstanding to those amounts used to calculate basic and
diluted earnings (loss) per share.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share - earnings (loss) available
to common stockholders $4,471,000 $(6,336,000) $(4,369,000)
Effect of dilutive securities:
interest on convertible debt 60,000 -- --
---------- ----------- -----------
Numerator for diluted earnings per
share - earnings (loss) available
to common stockholders after
assumed conversions $4,531,000 $(6,336,000) $(4,369,000)
========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,755,000 9,181,000 8,959,000
---------- ----------- -----------
Effect of dilutive securities:
Employee stock options 378,000 -- --
Warrants 434,000 -- --
Convertible debentures 129,000 -- --
---------- ----------- -----------
Dilutive potential common shares 941,000 -- --
---------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 12,696,000 9,181,000 8,959,000
========== =========== ===========
Basic earnings (loss) per share $.38 $(.69) $(.49)
========== =========== ===========
Diluted earnings (loss) per share $.36 $(.69) $(.49)
========== =========== ===========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A total of 367,000 shares of common stock representing the potential
exercise of options, warrants and the potential conversion of
debentures were not included in the calculation of diluted earnings per
share for fiscal 1999, as the impact of including such securities would
be antidilutive. All options, warrants, and convertible debentures
were antidilutive for the years ended September 30, 1998 and 1997.
(12) Fourth Quarter Adjustments
During the fourth quarter of 1997, the Company revised its estimates of
future revenues for certain product no longer being produced by the
Company. In addition during the fourth quarter of 1997, the Company
increased its provision for bad debts. The adjustments to revise
estimates of future revenues and increase the allowance for doubtful
accounts recorded in the fourth quarter of 1997 amounted to
approximately $2,600,000.
(13) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------
Cash paid for: 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest $7,436,000 $6,427,000 $4,487,000
Taxes $30,000 $40,000 $23,000
</TABLE>
Fiscal 1997:
- -- $667,000 of convertible subordinated debentures were converted into
84,562 adjusted shares of common stock.
Fiscal 1998:
- -- The Company acquired an 80% interest in US SEARCH.com in exchange
for certain guaranties of indebtedness. In conjunction with the
acquisition, liabilities assumed were:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $461,000
Cash paid for the capital stock --
Liabilities assumed $2,557,000
</TABLE>
- -- $300,000 of convertible subordinated debentures were converted into
51,282 adjusted shares of common.
Fiscal 1999:
- -- The Company assigned a note receivable from August of $192,000 to a
subsidiary to reduce pre-existing subsidiary obligations to August
(Note 9).
- -- $100,000 of a note receivable from an officer of the Company was
forgiven (Note 9).
- -- $296,000 in related party notes of US Search.com were forgiven (Note
9).
- -- The Company issued common stock with a value of $5,820,000 in
exchange for convertible preferred stock and detachable warrants in
Harvey (Note 1).
- -- $9,713,000 of convertible subordinated debentures were converted
into 1,288,185 adjusted shares of common stock.
- -- A formerly-consolidated film production subsidiary was
deconsolidated as the Company no longer exercised control. The non-
cash reduction in assets and liabilities were:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $16,000
Film and television program costs $1,810,000
Other assets $40,000
Accounts payable and accrueds $38,000
Notes payable $1,950,000
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and Due to End of
Period Expenses Write-offs Period
------------------------------------------------
<S> <C> <C> <C> <C>
Allowances for
Doubtful Accounts:
Year Ended 9/30/99 $2,509,000 2,959,000 (2,220,000) $3,248,000
========== ========= ========= ==========
Year Ended 9/30/98 $925,000 2,118,000 (534,000) $2,509,000
========== ========= ========= ==========
Year Ended 9/30/97 $693,000 1,310,000 (1,078,000) $925,000
========== ========= ========== ==========
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: January 27, 2000 /s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board, Co-Chief
Executive Officer and Secretary
Dated: January 27, 2000 /s/ ROBERT SWAN
Robert Swan
Senior Vice President and Chief
Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and the capacities and on the dated indicated.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: January 27, 2000 /s/ PETER LOCKE
Peter Locke
Co-Chairman of the Board and Co-Chief
Executive Officer
Dated: January 27, 2000 /s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board, Co-Chief
Executive Officer and Secretary
Dated: January 27, 2000 /s/ ROBERT SWAN
Robert Swan
Senior Vice President and Chief
Financial Officer
Dated: January 27, 2000 /s/ ADELINA VILLAFLOR
Adelina Villaflor
Controller (Chief Accounting Officer)
Dated: January 27, 2000 /s/ IRWIN FRIEDMAN
Irwin Friedman
Director
Dated: January , 2000
Stuart Hersch
Director
Dated: January 27, 2000 /s/ JOHN LANNAN
John Lannan
Director
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3 Articles of Incorporation (A)
4.1 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1,
1990 pertaining to 10% Convertible Subordinated Debentures
Due 2000, Series A (E)
4.2 First Supplemental Indenture between the Company and National
City Bank of Minneapolis, as Trustee, dated as of March 15,
1991 pertaining to 10% Convertible Subordinated Debentures Due
2000, Series A (F)
4.3 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990 pertaining
to 13-3/4% Convertible Subordinated Debentures Due 2000,
Series B (E)
4.4 Warrant agreement between the Company and City National Bank, as
Warrant Agent, dated as of March 19, 1991 pertaining to Common
Stock Purchase Warrants (F)
4.5 Warrant agreement dated September 5, 1997 between the Company and
Allen & Company Incorporated. (U)
4.6 Warrant agreement dated September 5, 1997 between the Company and I.
Friedman Equities, Inc. (U)
4.7 Warrant Agreement dated June 27, 1997 between the Company and I.
Friedman Equities, Inc. (U)
10.1 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Donald Kushner. (W)
10.1.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 between the Company and Donald Kushner. (Y)
10.2 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Peter Locke. (W)
10.2.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 between the Company and Peter Locke. (Y)
10.3 1988 Stock Incentive Plan of the Company (A)
10.4 Form of Indemnification Agreement (A)
10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of
October 1, 1988 between and among Donald Kushner, Rebecca Hight,
Peter Locke, Karen Locke, Peter Locke Productions, Inc. and
Twelfth Street Limited (A)
10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke
Shareholders' Cross-Purchase Agreement dated as of October 1,
1988 between and among Donald Kushner, Rebecca Hight, Peter Locke,
Karen Locke, Peter Locke Productions, Inc. and Twelfth Street
Limited (I)
10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between
and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke,
Peter Locke Productions, Inc. and Twelfth Street Limited (A)
10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement
dated as of October 1, 1988 between and among Donald Kushner,
Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions,
Inc. and Twelfth Street Limited (I)
10.12 Lease Agreement, dated as of November 1989, between the Company
and 11601 Wilshire Associates (G)
10.12.1 Amended Lease Agreement (G)
10.12.2 Lease Agreement by and between Arden Realty Limited Partnership
and The Kushner-Locke Company as of August 13, 1999. (Y)
10.16 Warrant Agreement between the Company and Chatfield Dean & Co.,
Inc. dated as of November 13, 1992 (J)
10.19 Fiscal Agency Agreement dated March 10, 1994 between and among
the Company, Bank America National Trust Company and Bank of
America National Trust and Savings Association (K)
10.19.1 Side letter between the Company and BankAmerica Trust Company to
the Fiscal Agency Agreement dated March 10, 1994 between and among
the Company, BankAmerica Trust Company and Bank of America National
Trust and Savings Association (K)
10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS
Securities Corp. (K)
10.21 Warrant Agreement dated March 10, 1994 between the Company and I.
Friedman Equities, Inc. (K)
10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the
Company, Bank America National Trust Company and Bank of America
National Trust and Savings Association (L)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.27 Loan and Security Agreement dated December 1, 1994 between the
Company and August Entertainment, Inc., and Guarantees between the
Company, August Entertainment, Inc. and the Allied Entertainments
Group PLC and certain of its subsidiaries (M)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q)
10.56 Letter Agreement, dated as of April 12, 1996, by and among The
Kushner-Locke Company, Chemical Bank and Chase Securities Inc. (T)
10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June
19, 1996, among The Kushner-Locke Company, the Guarantors named
therein, the lenders named therein and The Chase Manhattan Bank,
N.A., (formerly Chemical Bank) as Agent, and as Fronting Bank for
the lenders (the "Credit Agreement") (T)
10.58 Employment Agreement dated September 14, 1996 between The
Kushner-Locke Company and Bruce St. J Lilliston (V)
10.59 Loan and Security Agreement dated March 1, 1996 between The
Kushner-Locke Company and its subsidiaries and Banque Paribas,
Los Angeles Agency (V)
10.61 Waiver of Section 6.17 Overhead Expenses of the Credit Agreement,
dated as of . (V)
10.62 Amendment No. 5 dated as of December 22, 1997 to the Credit
Agreement. (W)
10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit
Agreement. (X)
10.64 Amendment No. 7 dated as of December, 1998 to the Credit
Agreement. (Y)
10.65 Waiver of Section 6.17 Overhead Expenses of the Credit
Agreement, dated as of December 9, 1999. (Y)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
27 Financial Data Schedule (Y)
</TABLE>
___________
(A) Incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-18, as amended, effective December 5,
1988 (Commission File No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report
on Form 10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-37192), as initially
filed on October 5, 1990 or as amended on November 30, 1990.
(E) Incorporated by reference from the Exhibits to the Company's
Registration Statements on Form S-1, as amended, effective November 30,
1990 (File No. 33-37192), and effective December 20, 1990 (File No. 33-
37193).
(F) Incorporated by reference to the Company's Registration Statement
on Form S-1, as amended, effective March 20, 1991.
(G) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended March 31, 1991.
(H) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1991.
(I) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1992.
(J) Incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-2, as amended, effective November 12,
1992 (Commission File No. 33-51544).
<PAGE>
(K) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal quarter ended March 31, 1994.
(L) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1994.
(M) Incorporated by reference from the Exhibits to the Company's Report
on Form 10-K for the fiscal year ended September 30, 1994.
(N) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended March 31, 1995.
(O) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1995.
(P) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1995.
(Q) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended December 31, 1995.
(R) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(S) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1996.
(T) Incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-2, as amended, effective August 15,
1996 (Commission File No. 333-05089).
(U) Incorporated by reference from the Exhibits to the Company's
Registration Statement on form S-3 as filed November 17, 1997
(Commission File No. 333-40391).
(V) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1996.
(W) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1997.
(X) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1998.
(Y) Incorporated by reference from the Exhibits to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1999.
<PAGE>
Exhibit 23.1
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statements
(Nos. 333-72785, 333-80521, 333-40391, 333-10239 and 33-82942) on Form
S-3 and (Nos. 333-79729, 333-63297, 33-45248 and 33-86768) on Form S-8
of our report dated December 21, 1999, on our audits of the
consolidated financial statements and financial statement schedule of
The Kushner-Locke Company as of and for each of the years in the two-
year period ended September 30, 1999, which report is included in the
Annual Report on Form 10-K/A.
PriceWaterhouseCoopers LLP
Century City, California
January 27, 2000
<PAGE>
Exhibit 23.2
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statements
(Nos. 333-72785, 333-80521, 333-40391, 333-10239 and 33-82942) on Form
S-3 and (Nos. 333-79729, 333-63297, 33-45248 and 33-86768) on Form S-8
of The Kushner-Locke Company of our report dated December 26, 1997,
relating to the consolidated statements of operations, stockholders'
equity and cash flows of The Kushner-Locke Company for the year ended
September 30, 1997, and the related schedule for the year ended
September 30,1997, which report appears in the September 30, 1999
annual report on Form 10-K/A of The Kushner-Locke Company.
KPMG LLP
Los Angeles, California
January 26, 2000
